You finally graduated from college—you’re starting your first job and looking forward to adulting like a champ! These are optimistic and exciting times, but also the times when we develop financial habits that can make or break us in the coming years. I’d like to share four things I struggled with, and some suggestions to make setting yourself up for long-term financial success a little easier.
#1: Saving is tough, but you have to do it.
I remember when I got my first “adult” paycheck—I thought I was RICH. But I also had a bunch of fun stuff that I wanted to spend my new “rich-ness” on: nights out with friends, new clothes, and a few weekend trips here and there. Before I realized what was happening, my bank account would be back to zero.
If you’re living paycheck to paycheck without building something for yourself, you’re setting yourself up for real hardship when the unexpected happens.
Yes, saving can be challenging, but setting aside 10–20% of each paycheck will start to build a financial nest egg. This money can help you pay for an unexpected expense like a big medical bill, or cover your rent and utilities if you find yourself between jobs. The easiest way to do this is to set up an auto-pay into your savings account when your paycheck arrives…you’re less tempted to spend money you don’t see in your checking account!
#2: Student loans will eat your paycheck.
Student loans are painful. At least 70% of college students are leaving school with $37K in loans, but some are carrying around well over six figures in debt. Definitely make sure to pay off any high-interest debt first, but even 6–10% interest on $40k in student loans can really add up.
If you have a little extra to pay, it could make a world of difference in the long run. Minimum loan payments largely go to interest, so you aren’t actually reducing the principal (the amount you owe) by much at all. Every extra dollar you pay off now is a dollar you aren’t paying interest for later.
I found that taking any “extra money” that wasn’t part of my regular income (e.g. tax returns, bonuses, gifts from family) and putting it toward my loans made a real difference. Sure, it wasn’t very fun as I watched my friends do cool stuff with their extra money—but I got rid of my loans quickly and with less interest!
#3: Having a bad credit score is wildly expensive.
Start building credit responsibly now. Your credit will be the most important factor for you in any major purchase. If you want to borrow money for a house or car, your credit score largely determines your interest rate—and whether you even qualify. The difference between 3% and 6% interest on a loan in the hundreds of thousands is gigantic.
Graduating from college, you may or may not have a credit score…but moving into adulthood, you want one. So how can you get there the right way?
First, check to see if you have a credit score and do a little research on credit online.
CreditWise® by Capital One® is a great tool—it’s free, and it won’t hurt your credit when you check your score. But to build your credit score, you actually have to use credit. The best way to do this is to get a credit card and use it for small purchases like gas and groceries. Just make sure to pay off your card in full (and definitely on time) each month. Paying off your balance each month keeps you from paying interest and late fees. At the very least, make sure you have automatic payments set for your minimum amount to avoid a missed payment. Missed payments can sink your credit score.
Second, using your debit card will not build your credit. If you’re afraid to use a credit card because you might get into debt, set a clear spending limit for yourself and make payments frequently so you don’t spend more than you have. When making a big purchase on a credit card, I might even pay the balance from my bank account that same day.
#4: Saving for retirement gets more expensive the longer you wait.
I know, retirement is the LAST thing on your mind right now. But if you start early, your retirement savings snowball with a lot less effort. Building a good base now will let you keep reinvesting the interest you gain, and then earn even more interest from that. And the more you keep adding, the faster it grows. On the other hand, if you wait to invest, it can take huge payments to your account to catch up. Get started now, and keep it up.
If your employer offers a 401K (especially if they match your contributions), enroll in the program to automatically debit part of your paycheck to your 401K. Should your employer not offer a 401K, look around for low-cost IRA or Roth IRA options. There are multiple providers in the market who offer simple options without a ton of fees. Even a little now goes a long way to building a strong foundation for the future.
These struggles are real, but you can get better with practice. Do what you can to appreciate your progress in the moment: keep track, build some visual charts, brag to family—whatever it takes to feel as good about your responsible decisions as you can.
While it’s not always easy to stay on track, it is much easier than trying to dig yourself out of a hole later in life. So, cheers to new beginnings: personally, professionally and financially!