Plan To Manage Your Finances as a New College Grad
If you’re starting your final year of college, now is a good time to think about the upcoming financial responsibilities you’ll be facing when you graduate. We share advice to help you set yourself up for success.
Graduating college and entering the "real world" is considered a pivotal moment for many people. Your early 20s is a prime time to enjoy greater independence, explore and try new things. At the same time, it's when you begin to shift toward thinking more about your future and taking on more obligations that come with being an adult — like handling your personal finances.
While it requires a lot more responsibility, being intentional and planning for your financial future is a necessary first step to starting off your post-college life on a good note, both personally and financially.
We talked to our lead financial educator, Stacey Black, for tips on how to approach this new challenge.
Consider Your New Financial Responsibilities
In many cases, parents help support their kids with tuition and living expenses while they're in college. In fact, according to Sallie Mae's 2021 Annual Report, parents covered 45% of college student costs (PDF) in the 2019-2020 school year. However, things may begin to look different upon graduation as you gain financial independence and join the workforce. Make sure you understand your circumstances and are prepared for the financial realities of becoming an adult.
"While everyone's post-college journey might look different, many face a lot more financial responsibility and a lot more income than they're used to," Black said. "Based on what your parents are willing to help support, figure out what areas you might need to start paying attention to or start planning for yourself."
Are you going to be responsible for paying your own phone bills and car insurance? How are you going to pay for rent and utilities? Do you have any student loans to start paying off immediately? These are some important questions to ask yourself.
You will also want to consider any hidden costs that may come into play. For example, think about how employment might add to your expenses: You might have to purchase an entire professional wardrobe or start paying for gas to commute to the office. Looking to live in another state or country? Be aware of all the costs associated with moving and adjusting to a new area.
"You don't always think about all of the little things off the top of your head, so it can be helpful to have conversations with friends and family who've experienced these things and ask them, 'What are some expenses that I'm not thinking of?'" Black said. "Then start listing and keeping track of these items so you don't forget about them."
Invest in Your Financial Knowledge
As you take on more responsibility for bigger purchases, it's important to research your options ahead of time to ensure you're getting the best deal. If you're about to purchase your first car, for example, figure out what information you need to help guide you through the buying process. Whenever you're making any decision, Black recommends looking for cheaper options or alternatives to land on more cost-efficient outcomes.
Also, take advantage of any free resources to help you get familiar with financial topics, from webinars and virtual events to videos or books. You may want to start researching about 401(K) retirement plans or what factors help and hurt your credit score.
"Dig in and figure out how you learn the best," Black said. "Think of this as a fun way to get engaged and invested in your financial education. This will ultimately set a solid foundation for your financial health down the line."
Of course, when doing your research, always be sure to look at more than one source. If you watch a TikTok or YouTube video with financial advice, make sure to fact check the information.
Setting attainable monetary goals will help guide you when transitioning into post-grad life. According to Lincoln Financial Group, 83% of people who set financials goals reported feeling more confident about their finances after just one year.
"It's okay to have more exciting goals like saving up for a new car or planning for your next vacation," Black said. "It doesn't always have to be a huge goal; it just has to be one that will motivate you to keep saving."
Meanwhile, there are certain goals to achieve that will help you maintain financial responsibility. Getting a head start as a graduating college student will ensure that you are well prepared for the next stages of your life. Consider these goals:
- Pay off any debt: Getting out of debt means having more control over your income. If you took on student loans during college, prioritize paying them off as soon as possible because the interest on them will compound as the years go by. It's also a good idea to pay off your credit card debt as quickly as you can to save on interest. You might be surprised how much you can save overall by dedicating a little extra toward your debt each month.
- Build up a good credit score: Having good credit can open the gate to many financial opportunities and plays a big role when making moves such as buying a car or renting an apartment. Property managers use your credit score to decide whether to rent to you, and lenders use your credit score to determine if you qualify for a loan.
- Open a retirement account: Although retirement may be the last thing on your mind, it's a good idea to think about it early on if you can. The sooner you contribute, the more money you will gain in interest. Consider a Roth IRA because it allows you to contribute post-tax income at the beginning of your career, while your income tax rate is likely to be lower. You won't have to pay income taxes on it when you take it out as retirement money. Open an account and start contributing to it monthly to reap major savings for retirement.
- Allocate money to your savings account: Maintaining a back-up savings fund will help you prepare for any emergencies or unexpected situations. Black recommends setting a goal of saving three to six months of expenses.
Once you've set some goals for yourself, actively work toward reaching them. Here are some of Black's tips to help you stay motivated and on track:
- Set it and forget it: If you're the type to easily forget things, setting up automatic deposits to your savings accounts will be your best friend. Whether it's for your emergency savings or Roth IRA, you can set up automatic deposits directly from your paycheck or another account. This way, you are consistently moving closer to your goals every month without even realizing it.
- Create separate funds for each goal: As a fun way to visualize your goals, some financial institutions let you create separate accounts for each of your goals. For example, if your goal is to save up for buying your dream car, label the account with the name of the car. This will help remind you of your specific goals every time you contribute to it and help you stay organized.
- Consider using goal-setting apps: Try downloading free goal-setting apps on your phone to get you motivated. Having a digital reminder or gamified activity can go a long way to help you stay focused.
Learn To Say No to "FOMO"
"FOMO," or the fear of missing out, is an anxiety felt among many young adults. When your closest friends are going for a night out or there's a viral fashion trend, it can be difficult to curb the urge to join in on every opportunity.
The pressure can influence many young adults to engage in excessive or impulsive spending behaviors. In fact, a 2018 study from Qualtrics and Credit Karma found that nearly 40% of millennials age 18 to 34 said they have gone into debt just to keep up with their friends' lifestyles. And, now more than ever, the recent rise in "revenge spending" has been causing many young adults to excessively spend on entertainment and travel to make up for lost time during the pandemic.
While it's true you should live in the moment and be open to opportunities when you're young, be careful because it can easily lead you down a road further away from your financial goals. Resist the urge to splurge on things you can't afford. Consider suggesting cheaper alternatives or offsetting your spending by cooking dinner with friends instead of dining out. Limit your time on social media to avoid the endless scrolling trap of tempting advertisements and social posts.
"If you want to go out and spend, try carrying cash instead of a card to keep yourself accountable as you spend your money," Black advised. "This will help you stick to a pre-set budget and see the physical dollars leave your wallet, making it less likely to spend on an impulse item."
Budget For Short-Term Expenses and Long-Term Goals
The key to budgeting as a soon-to-be college graduate is finding the right balance between spending on short-term gratifications and saving for longer-term financial goals. There are plenty of budgeting strategies out there that are tailored to different lifestyles, so find one that works best for your individual values and needs.
While it's important to give yourself permission to spend money on things you want to buy, it should always come with a reasonable limit. In general, this means cutting back to avoid overspending.
However, Black recommends not totally depriving yourself, either.
For example, if you're an avid coffee drinker and you're buying a cup of coffee daily, don't completely cut it out of your budget. Instead, cap it at just three cups of coffee per week to slowly phase it down and still satisfy your cravings.
If you're contemplating an expensive purchase, consider the 30-day rule: Put it off and check back in 30 days to see if you would still like to buy the item. This will encourage you to really think before making a bigger purchase and reduce your tendency to buy on impulse.
"At the end of the day, it's okay to spend money on short-term desires, but keep in mind that it will take you that much longer to reach your financial goals," Black said.
Getting in the habit of budgeting now will be the best way to practice managing your finances for the future once you have more to spend. Handling money can be tricky, but it's better to get a head start with it now than later.
"Think of this moment as an opportunity to set a solid foundation," Black said. "What you do now financially can either hurt you or help you in the long run. Doing the work now will set yourself up for success in the future."