I can almost hear Pomp and Circumstance playing in the background as I write this. Soon you will be thrust out of your wonderful college life into real life. It’s bittersweet…you may miss the friends you’ve made and the ease of socialization on or near a college campus, but, face it, you’ll be making money now, that’s why you went to college in the first place, isn’t it – to learn some vital skills to use in the real world so that you could be a good citizen, possibly give back, and, support yourself.
Well, your college has probably done an excellent job of helping you to be a well-rounded student. You’ve taken classes, whether you liked it or not, in math, science, writing, maybe even astronomy or geology. But, the one thing that they may not have taught you is the real-life skill of managing your personal finances. Here are 5 baby steps to take to get yourself on the right track once you graduate.
1. Live within your means
If you learn nothing else, learn this. It doesn’t have to be about creating a strict budget or watching every penny, you can make it a lot easier on yourself with a little planning. Start by understanding two things: 1) the bills you HAVE to have and pay – these are the (reasonable) costs of housing, transportation, utilities, food, etc., and, 2) how much you need to save – start by saving at least the match amount in your employer’s retirement plan when you are eligible and an additional 5% of your take-home income. Once you’ve set those costs aside you can spend the rest as you see fit.
Corollary to Step 1, #1 – Save first
If you are not a saver by nature, you may find the “save 5%” rule above a bit difficult. Make life easy on yourself by having this savings automated for you. You can either have your employer direct deposit the 5% into a special savings account and the rest into your checking account, or, have your bank automatically transfer a set amount each week/month/etc., whichever works for you. This way, out of site, out of (spending) mind.
Corollary to Step 1, #2 – Save now
Thinking that you are making meager wages and you’ll never be able to save? Think again, as this infographic shows, Life Only Gets More Complicated.
2. Attack any student loans outstanding
If there is one thing that will haunt you the rest of your professional life, it is student debt that you do not handle properly now. In my practice, I regularly meet young professionals who are preparing to buy a home or begin saving for children’s college costs, but, can’t seem to find enough extra cash to pull together because they are still paying off school loans. Start now – especially for higher rate loans. Don’t let these drag you down, be sure you understand your payoff options and choose the one that pays off the loan the quickest, within your budget. Beware and truly understand income-based payoffs – if your calculated monthly payment is less than the principal and interest would be for a 25 year loan, your loan will only continue to get bigger as unpaid principal and interest is rolled back into the loan.
3. Start a Freedom Fund
Everyone needs a Freedom Fund – it is your cash management tool to help you get through months when bills may be unexpectedly high. Eventually, this fund will grow to 6 – 9 month’s worth of income, but start with $1,000 to $5,000 in a savings account that is accessible to you, but, not too accessible. The idea is to turn to this account in months when that big car insurance bill comes in or the fridge breaks down, but, remember, your job is to keep it level – if you spend some of it this month, you’ll need to back-fill it next month.
4. Find the right bank and a credit card
Find a bank that has lots of locations and ATMs near where you work, live and play. Read the small print and choose a bank that meets your needs with no fees.
Then, through your bank or other provider get a credit card in our own name, if you don’t have one already. Start building credit the smart way by only charging what you can afford to pay-off at the end of the month and make your payments on-time. Like your Freedom Fund, your credit card is a cash management tool – not a cash machine. If you can’t live this way, do not get a credit card immediately, start with a debit card and specifically request that it not allow overdrafts so that you can only spend what’s in your bank account.
5. Get ready for Part II
These are the first steps to get you started – managing your personal finances and building wealth is an ongoing process. Get started here and take the first steps. The next article will provide information on the other parts of your financial portfolio: tax-, estate-, and insurance planning, as well as ways to start truly building your financial portfolio, now that you’ve got the basics down.