As a recent college graduate, you’re probably ready to start a new career and begin your journey toward your dream financial lifestyle. But in order to benefit from all potential opportunities, it’s essential to take the proper steps. The sooner you learn how to be financially stable after college, the more secure you will be by the time you reach your golden years.
The Importance of Financial Planning for Recent College Graduates
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Financial planning is the ongoing process of determining the best ways to manage your money. Whether you want to save for a new computer or set money aside for retirement, financial planning can help you make spending and investment decisions that offer lifelong financial stability.
As a recent college graduate, the idea of financial planning might sound a bit overwhelming to you. According to the 2019 Money Matters on Campus Report from EVERFI and AIG Retirement Services, 47% of college students felt they were not ready to manage their money.
One reason you might feel hesitant is a lack of experience. Many college students rely on their parents to pay their bills and feel uncertain that they’re ready to take the reins.
For instance, if you are currently included on your parents’ auto insurance policy, how will you know how to shop for car insurance independently? Your parents will probably tell you to shop for quotes and explore discounts for actions like having a good driving record or being a loyal customer, which would be great advice.
But do you know how to make these types of financial decisions by yourself?
By learning financial planning for fresh graduates, you can develop the skills you need to confidently navigate the wide range of money-related responsibilities you’ll encounter in your life.
Take These 5 Financial Steps for Money Management for College Graduates
If you’re new to money management, you might wonder what you can do with your money after college to give yourself lifelong financial comfort. The following steps can get you on the right track.
1. Learn How to Budget
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Budgeting is the process of keeping track of and managing your income and expenses. The primary goal of budgeting is to spend less than you earn while saving what you have leftover.
Here are some tips for creating a budget:
- Map out your monthly income and expenses. To get started, gather your paycheck stubs and write down how much you make each month. Then write down your bills (student loans, rent, utilities, phone, etc.) along with other recurring expenses like groceries and gas.
- Reduce your expenses. Once you’ve determined how much you bring in and spend each month, look for ways to cut your expenses. For example, you might be able to bring leftover meals to work for lunch instead of eating out. You could also consider exercising at home instead of paying for a gym membership.
- Create a savings plan. Next, you’ll want to devise a plan to save money. Whether you want to pay the deposit on an apartment or save for a vacation, you’ll want to determine how much to set aside each month and start putting it away in a savings account.
- Prepare for emergencies. Along with saving for future purchases, it’s essential to build an emergency fund. Ideally, you would aim to set aside several months to a year’s worth of living expenses for emergencies, but saving even a few hundred can be of great help if an unexpected event requires extra money.
2. Pay Down Your Debts
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If you accumulated debt while in college, you’re not alone. The Federal Reserve revealed that adults with education debt held an average of between $20,000 and $24,999 in 2018.
Credit cards have also become a debt issue for students. The 2019 Majoring in Money report from Sallie Mae and Ipsos explained that college students held an average credit card balance of $1,432.
While student loans and credit card debts are not inherently bad, they can present problems if you have trouble paying them, which is why it’s important to learn how to pay down your debts.
For student loans, it’s good to pay at minimum the interest portion of your debt each month; however, it’s better to pay more if you can afford it. You can also see if you qualify for any forgiveness programs that could reduce your total loan amount.
The general guideline for credit cards is to pay your balance in full each month. But if this is too much, try to remain in good standing by making the minimum monthly payment. Just know that doing so will accrue interest and increase your overall debt.
3. Work on Building Good Credit
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Building good credit is just as important in financial planning for recent college graduates as budgeting and paying down debts. By establishing a good credit history, you could open the door to getting an auto loan or making other major purchases.
Here are some tips for building good credit, particularly if you don’t have a credit history:
- Get a credit card. Securing a credit card is a great way to show creditors you are able to manage revolving debt. If you have trouble qualifying for a credit card, consider a secured card, which allows you to deposit funds (usually around $300) that you can then use as a line of credit.
- Report bills to credit bureaus. You can use services that allow you to report your rent payments and possibly even your utility and cell phone payments to credit bureaus. This way, you can prove your ability to make on-time payments.
- Keep debts in good standing. If you already have existing debts like student loans or credit cards, be sure to keep them in good standing by making at least the minimum payment each month.
Ultimately, you want to showcase your ability to manage installment debts (loans) and revolving debts (credit cards) while having no past-due or delinquent accounts. Keep track of your progress by periodically requesting your credit reports and scores from Experian, Equifax and TransUnion. A good minimum credit score to aim for is 700.
4. Start Planning for Retirement Early
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It’s never too early to begin thinking about retirement. The sooner you prepare, the less likely you will be caught off guard in your later years. Here are two retirement planning options to consider:
- 401(k): A 401(k) plan is a popular defined-contribution plan for individuals working traditional jobs. With this type of plan, you contribute a specific amount from each paycheck to a retirement account, and your employer boosts your account by making matching contributions.
- IRA: The individual retirement account (IRA) is a defined-contribution plan that you usually open and contribute to independently. Common IRA types are traditional and Roth IRAs. They typically have lower yearly contribution amount limits than 401(k) plans.
If you’re not sure how much you should set aside for retirement, the Center for Retirement Research at Boston College recommends saving 10% of your income if you start at age 25 and want to retire by age 65. If you begin saving at age 35, you should set aside 15% of your income.
5. Begin Growing Your Wealth
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As a young graduate, you might desire more than financial comfort; you might want to know how to build wealth after college. It is a worthy goal that you could realistically achieve with the right financial planning and strategies. Here are some ways to get started:
- Invest in stocks. Stocks are commonly understood to be risky investment options because you are buying ownership in a company that could thrive or fail. Stocks can offer great returns as well as significant losses but are good options to consider for diversifying a portfolio.
- Buy bonds. Bonds are considered fixed-income assets since you are essentially lending money to a company and receiving a set amount in repayment with interest. These investments are typically deemed safer than stocks while still bringing in reasonable returns.
- Consider mutual funds. Mutual funds allow you to pool your money with other people and institutions to purchase financial assets. Though mutual funds are generally considered safer than stocks, they can also be more expensive.
- Purchase a home. A home is an asset that usually appreciates and is therefore considered a safe, long-term investment. However, think seriously before buying your first home since your career could make it challenging to commit to one city as a young person. Also, keep in mind that you will need to add to your budget extra funds for homeowners insurance, home upkeep, taxes and more.
Money management for college graduates is easier than you might think. It’s all about taking the steps that are most comfortable for you. You can start by opening a savings account and depositing funds you have available, or you can dive in and begin purchasing stocks and mutual funds. Your post-college money management should also include negotiating a salary for yourself that shows the worth of your degree and the job you’ll be doing. No matter how you start, you will always be able to create new financial plans designed to help you make your greatest goals a reality.
About the Author
Stacey Bumpus is a writer for MoneyGeek. She has more than a decade of experience creating online content in the areas of personal finance, education, career and entertainment. Her personal finance work has included insurance, budgeting, retirement and savings. Stacey’s articles have been featured on MSN Money, Business Insider and Credit Karma among other online publications.
- Board of Governors of the Federal Reserve System. “Report on the Economic Well-Being of U.S. Households in 2018 – May 2019.” Accessed April 9, 2021.
- Center for Retirement Research at Boston College. “How Much Should People Save?” Accessed April 9, 2021.
- EVERFI and AIG Retirement Services. “2019 Money Matters on Campus Report.” Accessed April 9, 2021.
- Sallie Mae and Ipsos. “Majoring in Money 2019.” Accessed April 9, 2021.”