Learning to set aside money for yourself after graduation is a tough lesson for a lot of new grads. Think about it – students spend countless hours at university, yearning to put their theoretical knowledge to hard work in exchange for a paycheck. Since students are used to having no money for so long, the first paycheck comes along with a huge sense of freedom. Suddenly, there are so many more options (read: things to buy) and so much more is now within reach. I have many friends who reached this point shortly after graduation and started making decisions that ended up handicapping themselves financially. Avoid falling into that trap by following this simple game plan for saving money after college graduation.
Live with your parents as long as reasonably possible. Seriously. I know the idea of impressing friends and coworkers by talking about your new apartment/condo/house is gratifying. The ability to have friends over to your very own place has an irresistible appeal. However, the amount of money you are able to save by not having to pay a rent or mortgage check each month is worth more in the long run. Use this time period with the parents to build up an emergency savings fund and then do whatever you want with the additional money you’re able to save (hint: save up for a down payment on an apartment or house). Whether you’re in the Midwest or East Coast, a monthly rent of $1,200 is not beyond imagination. Over 12 months of living with your parents, that would equal $14,400 of savings. That’s just $6,250 short of the recommended 6 month emergency fund for a person making $50,000 per year.
This section may only apply to those who live in a suburban area because city dwellers should obviously rely on public transportation. If you live in a suburban area, you definitely want to have a reliable set of wheels to get you where you need to go. The best option is to buy a used car (or keep your current car) and pay it off as soon as possible. It’s that simple.
One common mistake is buying a new car just because it has all the new bells and whistles. I’m sure you’ve heard it before: the value of the car drops 25% as soon as you drive off the lot. Who cares? You’re not selling it soon, right? That may be true. But the problem is your car payments do not drop 25% when you drive off the lot. You’re still making payments based on the purchase price you agreed to when the car was brand new. That purchase price was (theoretically) aligned with the value of the car. After the value of the car is reduced, suddenly, you are paying for value that doesn’t exist!
The only caveat to this discussion is in the case of an employee who drives clients around and needs something more professional than the scratched-up Honda Civic that you drove around in college. Depending on how far you drive per year, it may even make financial sense to lease a nicer car.
Assuming you are in relatively good health, you should set up a High Deductible Health Plan (HDHP) and start a Health Savings Account (HSA) through a local credit union. The HDHP costs less than most other health insurance plans and an HSA allows you to set aside pre-tax money in a checking account which accrues interest. If you do not use the money in the HSA account, it will just keep accruing money; it doesn’t go anywhere. It is not a “use it or lose it” situation like Flexible Spending Accounts (FSA).
Using a HDHP and HSA is not an optimal setup if you frequently buy prescription medication or are highly susceptible to specialist or emergency room visits. Most medical insurance providers offer a comparison tool on their website to compare different insurance plans. Make sure to perform a comparison between plans using multiple health scenarios to determine which plan is most appropriate for you.
Many of your friends will be getting married over the next few years and this means you’ll be traveling all over for weddings. Take advantage of credit cards which provide reward points for your everyday spending. Many of these cards offer generous bonus rewards just for signing up for the card.
From personal experience, I recommend applying for the Marriott Rewards Visa credit card from Chase due to the points structure and numerous Marriott brand locations.
Retirement seems almost irrelevant when you have approximately four decades of work left in your career. However, I can assure you that bi-weekly contributions of 15% of your income to a 401(k) or Roth IRA will be the smartest thing you ever did. You’ll be patting yourself on the back in only a few years, when you realize how quickly you’re accumulating thousands of dollars in your retirement account. Start contributing 15% of your paycheck as soon as possible.
The recommendations above are meant to serve as a basic level of guidance for recent grads. They may not be entirely applicable to you based on your specific financial situation. For example, if you have thousands of dollars in student loans to pay, you will want to contribute less money to a retirement account and focus on paying down the high-value loans which are accruing interest.
Category: Personal Finance
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