Those just entering the real world have every right to feel a little overwhelmed and perhaps under-prepared when it comes to managing money. Navigating the world of personal finance can be tricky, even as an adult with quite a bit of experience. Big things like saving for the future, retirement planning and paying back those seemingly endless student loans are not exactly less-than-intimidating responsibilities. Yet personal finance basics need not be complicated; with a little savvy, some smart planning and a willingness to work hard, new grads should be able to turn that college education into a foundation for a solid future. If you’re struggling to understand the economic world in your first few months out of school and on the job, consider some of these facts to help you through that sometimes rough learning period.
If these stats don’t make it clear that proper management of your finances is important, few things will.
- Since 1970, discretionary income earned by the lower 80% of wage earners in all industrialized nations declined steadily each year without exception. Unfortunately, you’re entering the job market at a bad time, with wages down and jobs hard to find. That means that you need to be extra careful with the money you earn, focusing on saving and spending wisely.
- Fewer than 10% of all U.S. citizens nearing retirement have sufficient investment or retirement income to maintain their current lifestyle. Do you want to be in your sixties and still worried about how you’ll pay your bills in the coming years? Start saving for retirement as soon as possible to help ensure you’ll have the funds you need to afford that dream house in California.
- American citizens in all age groups report the lowest level of savings during any period since 1970. This could be due to declining levels of discretionary spending or simply different attitudes about money that encourage spending now rather than saving for the future. While you shouldn’t deny yourself everything you want, you should ensure you start building a hefty nest egg for the future, especially if you plan on sending children to expensive colleges such as Harvard University.
- Less than 30% of U.S. adults view their personal financial knowledge as very good or better. Topics they’re least confident about? Investing, retirement planning and consumer rights. Whatever the weak spots in your knowledge, start working now to learn all you can about finance. You don’t have to be a financial expert working on Wall Street, but check out websites, read books and talk to others.
- Sixty-one percent of Americans are living paycheck to paycheck, up from 49% last year and 43% in 2007. While some simply can’t help it due to high costs of living and low income, others are spending their way through their entire paychecks. This isn’t a good thing and could spell disaster if a job is lost. Never live paycheck to paycheck if you can help it and always put something away for later.
- Average credit card debt per household was $8,329 at the end of 2008. By 2010, it rose to $15,519. Credit cards can be a great way to build credit and earn you some free benefits. They can also put you into serious debt and could take you years to pay off. Never charge more on a credit card than you can pay off by the due date.
One of the first steps towards a bright financial future is establishing good money management skills. Whether that means setting up a budget or just spending smarter, check out these facts for help guiding your financial journey.
- Living at home can be a smart financial choice. As much as it might pain you to move back home, it could help you pay off college debts more quickly and start saving. You won’t be alone, either. Twenty-five percent of young adults ages 18 to 24 lived with their parents in 1990. By 2000, this figure increased to 52%.
- It is essential to create a financial plan. You need to lay out specific goals and how you want to reach them. Plan your Colorado skiing trip, car repair fund, and even grocery budget in advance. This way, you’ll have a plan when you save money every month.
- Small indulgences add up quickly. Spending $5 on lunch every day or $3 for a coffee doesn’t seem like a ton of money at first, but think about it in the big picture. That’s $25 on lunch each week and $12 on coffee. Each year, that adds up to $1,300 on lunch and $624 on coffee, give or take a few dollars.
- Tracking your income and expenses will help you understand where you can improve. Maybe you’re spending too much on going out to eat or could be saving just a little bit more each month. Finding tools to help you track spending can be a great help in planning for a strong financial future.
- You will not be able to go out every time you want to. Being an adult means having to be a little more responsible than you might have been in college. You won’t be able to go out every single night if you’re trying to save money, so choose your fun activities wisely.
- Peer pressure won’t get any less intense after college. You might have thought your days of peer pressure were over, but it doesn’t let up after school is done. Your friends and family will still urge you to spend money on everything from going out to dinner to the hiking trip to the Grand Canyon.
- Setting up automatic payments can help you pay bills on time. Thirty-two percent of college students have either missed or been late on a credit-card payment. It goes without saying that this isn’t a good thing, so always make sure your bills are pay in full and on time.
- You must monitor your bank account. In the age of debit cards, it’s easy to go weeks without checking up on your bank account. Yet twenty-four percent of college students have bounced a personal check. Don’t let it happen to you, check your bank account levels regularly.
- Living within your means isn’t a punishment. Approximately 40% of families live off 110% of their incomes. Don’t become part of this stat. Learn to start living within your means from the get-go and you won’t be as tempted to overspend later.
Debt and Credit
Whether you’re used to having debt or not, it’s a reality for many students graduating from college with hefty loans to repay. Here are some facts that can help you navigate the world of debt and credit.
- Buying a new car just doesn’t make sense for most new grads. Cars begin depreciating as soon as you drive them off the lot, so it doesn’t make sense for a cash-strapped new grad to invest in a new one. A car that is a few years old is a much better value for the money.
- Ignoring big debts can have major consequences. Debts cannot and should not be ignored. Not only will creditors come after you, you will wreck your credit score and build up thousands of dollars in interest payments you could have easily avoided.
- You need to pay more than the minimum on any debt. It can take decades to pay off a only a few thousand dollars on a credit card balance by making only the minimum monthly payment. Not to mention that you’ll end up paying three or four times the original amount. Always pay as much as you can.
- Credit cards can be useful, but also dangerous. Credit cards can be useful – and are almost required in some circumstances – but grads must always be aware of the danger they also pose if not used correctly. Interest adds up quickly and can cripple your finances for years.
- You need to check your credit report annually. Do you have any idea what your credit report shows? You might not have a long history of credit, but it never hurts to check to make sure everything is in order. Did you know that your credit score is the single most important factor when applying for a loan for a house, a car or even a new credit card? 56% of Americans didn’t know that, so be smart and start monitoring early.
- Buying something big with zero money down is financially irresponsible. It might seem awesome that you can get a new TV for no money out of pocket today, but it’s pretty dang stupid to do so if you’re paying interest on the balance. Never make a large purchase with no money down. It will cost you big time in interest charges.
- You must always read the fine print. Sixty-four percent of consumers ages 18 to 24 do not know what interest rate they’re paying on their credit card. Do you? Whether it’s credit cards, an apartment or a loan for a car, you always need to read the fine print to see what you’re really signing up for.
Learning to save money and spend less will be one of the biggest lessons you’ll learn as a newly financially independent grad.
- Saving now will help you build good financial skills for life. Learning to live within your means and not make extravagant purchases will help start you off on the right foot. If you learn to be happy with less early on, you’re not likely to start splurging later.
- Experts advise saving at least 10% of your income. Unless you’re living in a super expensive city, this should be more than possible for most young people. Plus, it will put you way ahead of the curve when compared to the rest of America. Personal saving as a percentage of disposable personal income was only at 3.0% in August 2009, nowhere near that 10% mark.
- Building an emergency fund can be more important than paying off debt. 50% of Americans have less than one month of savings saved for emergencies, yet in an uncertain economy having that money to fall back on can be essential. Pay yourself and your debts every month to help ensure you’ll be safe if financial disaster strikes.
- Buying with cash, not credit, can help you cut back on spending. People spend 12-18% more when using credit cards than when using cash, so if you want to cut back on your spending, simply pay with cash not plastic.
- Cutting coupons is only smart if you’re already planning to buy an item. Coupons might seem like a great deal, but they only help you save money if they’re discounting items you already had plans to buy. Otherwise, you’re just spending more and saving nothing.
- You need a safety net in case you lose your job. Never forget that you need a cushion in your savings to help you if you lose your job. Ideally you’d have enough to pay rent and bills for six months, but even a three month cushion can be a big help.
- Deduct money automatically from your account for painless saving. If you have trouble putting money into savings, consider making it automatic. This can help ensure you save what you need – and you won’t even miss the difference.
- You can save $112,000 over a lifetime by bringing your lunch to work. Going out to eat can be expensive. Reduce on expenditures like this and you could seriously improve your financial situation.
- Finding a higher interest savings account can pay off. Most savings accounts don’t pay much of anything these days in the way of interest, yet there are still a few, mostly online, products that do. Seek one out for better utilization of your funds.
- Shopping around for banks is a must. Not all banks are created equal. Some will have more fees, others will be more friendly and some are simply more convenient. Do your research and make the best choice for you.
- Save up to buy big items. Putting a big item on credit is far easier, but it will pay off in the long run to save up if you want to buy something big instead of shelling out interest when having it sooner.
Think you don’t have to worry about retirement because it’s decades away? Think again.
- Putting $250 a month into an IRA will yield $500,000 when you retire. That’s not a lot of money to miss every month, but in a properly managed retirement account, it can add up big time.
- It is never too early to begin planning for retirement. The sooner you start saving, the more money and financial security you’ll have down the road.
- Employer 401K matching can help you more quickly meet retirement goals. If your employer matches contributions to a 401K or IRA, take full advantage and put as much as you can into a retirement account.
- Life insurance isn’t a bad bet, even if you’re young. Funeral expenses can be pricey, so a small payout life insurance plan can help pay for some of those things if something should happen to you. If nothing else, think about how it won’t stick your nearest and dearest with big bills on top of their (ostensible) grief.
- Retirement savings is important because of inflation. During your lifetime, the rate of inflation has been steadily increasing, meaning that your purchasing power keeps going down. You need to save more because money won’t have the same value 40 years from now that it does today.
From getting the most out of your job to getting help planning your financial future, these guidelines can help you become much more money savvy.
- Employers may offer discounts things like travel and gym memberships. Do you take the train to work each morning? Many employers offer transit cards that are taken out of your paycheck pre-tax. It could save you big bucks over a few years. Additionally, many employers partner with local businesses to offer discounts on everything from gyms to buying a new computer.
- Sharing costs with a roommate can help with high prices in urban areas. In some parts of the U.S., it may simply not be financially feasible to live alone. Offset your rent costs by living with a friend or sibling instead.
- Finding a job you love that pays less will pay off more in the long run. If you have to choose between a job in your field that pays less and a job in another that pays more, always choose the one you’re more passionate about. You’ll waste precious time at a job you’re not interested in, when you could be working your way up the ladder in a field you love.
- Your tax return isn’t free money. A tax return isn’t a financial boon meant to be spend frivolously. It’s simply your money that the government is returning to you. Spend it as wisely as you would a paycheck.
- Additionally, getting a big return isn’t necessarily a good thing. Ideally, you don’t want to get a big tax return. Unless you’ve bought a home, adopted a child or have serious college expenses, your tax return should be small.
- Renter’s insurance can help protect you in an apartment. If there should be a fire, flood or other disaster, you’ll save yourself thousands by investing in a renter’s insurance plan.
- There is no shame in asking for help. Who says you have to go through your financial journey alone? Find a financial planner or ask you parents for advice.
- You can’t rely on your parents forever. As nice as it is to have your parents to fall back on, at some point you’ll have to learn to manage expenses on your own. The earlier you start learning about smart finances, the better.
- There is no better time than now to learn about personal finance. Fifty-seven percent of parents say that students on the cusp of adulthood do not understand the value of money. Do you? Take the time to learn now so you can enjoy a great financial future.
- Your financial mistakes can stick with you. Don’t be stupid with money just because you’re young. These mistakes may haunt you for the rest of your life.
- Renting may be better than buying depending on your goals and where you live. While many have the long term goal of buying a home, in some cases it may be smarter to rent for awhile instead. Do the math for yourself before diving in.
- You’re going to make mistakes, but you’ll learn from them. Financial mistakes won’t kill you, but they should teach you some lessons that stick with you for life.