Update: Mike from CleverDude.com hosted this week's Carnival of Personal Finance and this blog entry was included. Click here to read the carnival! A carnival is a collection of submitted links presented in a format decided by the host.
Graduating from college is a big adjustment for most students as s/he has to trade-in an insulated, academic, environment for the so-called "real world." The transition from student to working adult is critical, especially in regard to getting your personal finances off on the right foot. The foundation a recent grad lays in the 2-3 years after graduation often predicts how s/he will lead the rest of their economic life. If the recent grad is interested in a flashy new car, eating out, and living in an expensive city, for example, then s/he often delays saving money, paying off student debt, finding the right career, and being financially independent overall.
Graduating from college is a big adjustment for most students as s/he has to trade-in an insulated, academic, environment for the so-called "real world." The transition from student to working adult is critical, especially in regard to getting your personal finances off on the right foot. The foundation a recent grad lays in the 2-3 years after graduation often predicts how s/he will lead the rest of their economic life. If the recent grad is interested in a flashy new car, eating out, and living in an expensive city, for example, then s/he often delays saving money, paying off student debt, finding the right career, and being financially independent overall.
Here are some practical steps the recent grad can take to ensure that their personal finance life gets off on the right track (after all, you don't want to be worrying about credit card debt by the time you're 25, right?):
1. Begin paying off your student debt as soon as possible. It's tempting to pay the minimum amount each month (especially if you have a low rate), but debt (outside a home mortgage) is a bad thing, so focus first on paying off your student loans (do this at all costs, no one wants to be paying off student debt at the same time they see their first gray hair!).
2. Continue to live with your parents and do not get an apartment. If you're lucky enough to have parents who do not force you out (just because you're over 18) or charge you to live at home, then you've hit the lottery (just think: free food, heat, water, TV, Internet, etc.). Your parents can actually be cool to hang out with (just make sure to have plenty of wine in the house)
3. Do not buy a new car. As I've said before, a new car is a colossal waste of money (whether you are 22 or 60) given that most new vehicles depreciate an average of 45 percent in the first three years! Take the bus or mass transit or look for a bare bones used car that has basic safety feature like stability control, airbags, ABS, etc.
4. Pay for things in cash and if you don't have cash then don't buy it. This tip is really about controlling how you use your credit card. It's ok to have one and use it but be sure to pay off the full balance each month (this will actually help you build a good credit score so that when you go and buy a house you'll get a better mortgage rate and don't have to ask Aunt Peggy for the down payment).
5. Max out your 401K contribution immediately, especially if your company offers a match. There's plenty of data that states that the sooner you start saving the faster your money will compound. And remember that you're saying no to free money if your employer offers a company match!
6. Create an emergency cash fund. I like to have 6 months of living expenses as an emergency fund, some folks say 3 months but having more money in the bank makes me feel all tingly and safe at night.
7. Take risks with your career / job. Now is the time to develop a business or work extra hard at work and demand more responsibility. Just think, there is really nothing at risk: most new grads do not have a family, mortgage, car payment, etc. so you can let your career or business idea be at the center of your universe.
8. Network. Keep in close contact with ex-student friends, professors, etc. The ex-Prof you had beers with may help you land a job or know of alumni that can help.
9. Think like an entrepreneur and don't settle. Your brain is actually sharper in your early twenties and things like critical thought, logic, and creativity will only worsen with age so think big and try to develop the next great consumer product, web site, information product, non-profit, etc. Oh, on the settling part, if you think you have a certain feeling that you would be good at something, but see a direct path to be a lawyer or teacher don't settle for a teaching gig, for example, just because it's safe. Anything that's worth something requires failure and not settling for mediocrity (nothing against lawyers and teachers!).
10. Delay getting married and starting a family. This one may be subjective, but I don't see any reason to rush into getting married and starting a family. If you get married you'll need your own place and kids are often a close second (and those little guys require $$$)
Are there things I've missed or that I've gotten totally wrong?
College is where the debt usually begins and it's important for parents to beat financial knowledge into their children before living on their own.
I couldn't agree with you more, Thomas.
Vince
In the intro you mention that the first few year after college predicts someone's financial future.
I couldn't agree more. For most of us who are in their later 20s or early 30s, we know (either first-hand or by watching others) that the choices made in years can drive our finances.
One of the biggest things is that by spending more than necessary you miss out on the long-term benefits of growth of investments through compounding.
So by spending too much (and often having debt to pay off for even more years) you are getting hit by both the debt payments for several years and not getting the investment growth in retirement plans.
I think 7 is interesting. Mainly cause it relates to my position in life right now.
Yeah, really go after what you want (this is a rare time in your life and you should really go for it)!
Vince
Hi Frugal Pod,
Yes, compounding is a wonderful thing! Debt is bad at any age, but especially early on because it's when you build habits and you want to have good, financial habits for your entire life!
Vince