June 16, 2015
by Michelle Perry Higgins
There are several pieces of advice I wish I had followed after graduating college. Perhaps the biggest mistake that students make after graduating and getting a job is to forget what they learned in college about living frugally. They splurge with their newfound money, don’t take advantage of retirement plans and ramp up their credit-card debt. In order to avoid these problems they can take a number of steps.
1. Start budgeting on a consistent basis. Matching your income against expenses is important at any age or stage in your career. Identify the spending categories and allocate an amount to cover each one. Don’t forget to include a category for fun things as well. Creating and staying with a budget gives confidence and a sense of accomplishment. It’s like making your bed first thing in the morning to start your day. It also means that you will have some warning that your spending is getting out of control before your finances are significantly impacted, so you can take action to turn things around. Over time, you will develop your own system that will work for you and make the budgeting process easier.
2. You need to start saving into a retirement plan right away. You should start with your company’s retirement plan, especially if the company offers a match to your contribution. The match is “free” money. If your company does not have a retirement plan, then you can start an IRA. The goal is to save 20% of your income for retirement. If you begin immediately to save to the retirement plan by payroll deductions, you will see the same paycheck hit your account from the start and not feel like you are losing anything by saving. The reason why it so important to start contributing as early as possible is the power of compounding.
3. You should start to create an emergency fund totaling six months of living expenses. This doesn’t have to happen overnight, but you should strive to make steady progress over time. Open a separate savings account for the fund in order to keep it separated from your other accounts, making it less likely you will access it unless there is a true emergency. If you lose your job or your car breaks down, you will find this fund to be a lifesaver.
4. Strive to pay off your debt, including student loans, as quickly as you can. And don’t just pay off the minimum or you will never make progress.
5. If you are in a committed relationship, be absolutely upfront about your finances at all times. Disclose everything including what you spend, what accounts you have, etc. I have seen many relationships damaged or lost because one party was secretive about their financial situation and the other party discovered the secrets they were trying to hide. Money is one of the major stressors in any relationship and you always want to have open communication with your partner.