Graduating from college is a major life milestone that ushers in lots of changes. For many new graduates, one of the biggest changes involves becoming financially independent.
“The most important thing to learn about money after you graduate is that there is only one bank — and it’s yours,” advised Andrew Selepak, a department of telecommunication professor at the University of Florida and director of the graduate program in social media. “When you use a credit or debit card, it’s your money either out of your account or that you will have to pay back later.”
Figuring out how to manage money as a new grad often comes with lots of bumps in the road, but you can make smarter financial choices by learning from the mistakes that past grads made. Here are the top four to avoid.
1. Not keeping careful track of your finances
A new post-graduation salary often means you’ll have more cash available. With more money, it’s essential to keep tabs on what you’re doing with your income.
“In business, we spend a lot of time looking at cash flow,” said Stephen Hart, CEO of Cardswitcher. “I think we should all be tracking our own personal cash flow, looking at when our debts come out and when our salaries come in. If you understand your own personal cash flow, you can make much smarter buying decisions.”
Creating a budget helps you responsibly allocate cash, but it’s also important to pay attention to what you’re doing with your cash. Unfortunately, far too many new grads make the mistake of not monitoring where money is going.
“It sounds simple but forgetting to check your bank account is an easy way to lose track of how much you’re spending,” advised Bryn Gelbart, content coordinator at Fueled, an app strategy and development agency in New York. “I used to be like this and tried to estimate in my head, but it’s easy to forget about minor expenses that add up. One day you’ll be broke and have no idea why.”
Money management apps can help you track your spending, see if you’re sticking to your budget categories, and catch little expenses that add up to big spending if you’re not careful.
If you discover you’re not managing your money as wisely as you could be, you might want to consider switching to an envelope system in which you put cash for each spending category into a physical envelope and only spend until that money is gone.
2. Spending more to match your new salary
If your degree paid off, hopefully you have a great job. But because you have a big paycheck doesn’t mean you need to upgrade your lifestyle. Unfortunately, far too many new grads substantially increase their standard of living after graduation.
“A big mistake many people make after graduating college is when money starts coming in, they start spending it just as quickly,” said Brett Helling, owner of Ridester. “I’m no exception. When Ridester.com gained traction and started making money after graduation, I spent money just as quickly as it hit my bank account. I treated it as if it would never end. I bought a new house, one of the fastest sports cars on the market, and began footing the bill for my friends every time we went out.”
Spending his higher income didn’t end up making Helling happy.
“Looking back, recklessly spending money for such a short-term benefit was a huge mistake,” he said. “In the moment, I thought new material things would make me happy, but it had quite the opposite effect. After a few months, I got used to the car and house, and don’t really see the friends I spent so much money on anymore.”
Helling recommended new grads spend strategically when they start seeing bigger paychecks, including avoiding reckless spending and making a plan for what to do with your money. This plan could include aggressively paying down debt or focusing on saving up for an emergency fund or putting money aside for retirement.
He believes this is important not only because there’s always a risk you could lose your job or income could go down, but it becomes harder to save later in life as financial obligations grow.
“When you have dependents such as a family, you’ll really wish you would have saved more when you were younger,” said Helling.
3. Paying too much for a car
While there are many areas in which new grads choose to overspend, a costly car is an especially common expenditure.
“One of the biggest mistakes graduates make is buying a new car once they graduate,” warned J.R. Duren, a personal finance expert at HighYa. “It’s an appealing proposition, most likely because the car they’re driving during college is their first car, which is not that great.”
Unfortunately, signing a lease or taking out a car loan for a new vehicle is a decision new grads often regret.
As Duren pointed out, the average price of a new car — which is around $35,285, according to Kelley Blue Book — is close to the average student loan balance for most graduates. But cars go down in value, so you’re in debt for an asset that’s worth less than you paid for it, while a degree increases earning power.
Buying a costly car isn’t just a bad idea because of high car payments. Taking care of an expensive vehicle also eats into available income.
“During my 20s, I put a fair amount of my discretionary funds into three different used European sports cars — all convertibles, of course,” said Timothy G. Wiedman, a retired associate professor of management and human resources at Doane University. “As used cars, they all developed mechanical problems at one time or another that usually seemed to require expensive imported parts and special tools to repair.”
So what should you do instead of springing for a fancy new set of wheels?
“My advice is to find a late model car that’s $15,000 or less,” Duren said. “There’s a good chance the car will have some of the original manufacturer’s warranty, the miles will be low, and your monthly payments will be nearly half what you’d pay for a new car.”
4. Failing to invest for the future
Finally, one of the biggest mistakes new grads make is not taking advantage of the opportunity to invest and make their money work for them.
“Based on my experience as a college business professor for 28 years, I can attest that a great many millennials don’t comprehend the earning power of compound interest — and quite frankly, neither did I as a college freshman,” Wiedman said. “With that lack of financial education, I put off starting to save for retirement and didn’t open my first [individual retirement account] until I was almost 32 years old. But the earning power of compound interest is based on time, so an initial delay can have severe consequences.”
Helling also regrets waiting to start investing, especially because he missed out on employer contributions to his retirement account.
“When I first graduated, my first full-time employer offered a 5.00% 401(k) match,” Helling said. “For every dollar I contributed to my retirement account, my employer would match that dollar up to 5.00% of my total annual salary. However, in my ignorance, I didn’t contribute anything, leaving quite a bit of ‘free’ money on the table.”
Helling advised other new grads not to make his mistake, even if it means giving up other spending.
“If you have to, sacrifice a dinner or two per month, then put that money away for retirement,” he said. “You’ll be glad you did once it grows over the years.”
By keeping tabs on spending and avoiding unnecessary purchases such as an expensive car, you should be able to start investing early in your post-grad life so you’ll be on your way to a financially stable future.
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