FINANCIAL DO’S AND DONT’S FOR GRADUATES
With a diploma in hand, many young graduates are ready to take the workforce by storm. Yet, with a regular income comes more responsibility, says Mike Sullivan, director of education for Take Charge America, a national non-profit credit counseling agency.
“Often times, we see young workers fall deeper into debt as their income rises. The reason: their spending increases too,” he said. “One of the most important lessons young grads will learn is how to budget their money and start saving.”
It’s estimated that employers will hire 17.4 percent more recent college graduates this school year than in 2005-2006, according to the National Association of Colleges and Employers.
But Sullivan notes that many graduates – even those with higher paying jobs – are facing thousands of dollars in student loans and record amounts of credit card debt. Balancing debt and income can be tricky, and it requires a reorganization of priorities, he adds.
So, what should your priorities be? Sullivan describes the financial do’s and don’ts for recent grads:
Do pay off credit card debt – Credit card debt is so prevalent among 20-somethings that the young adults have been dubbed “Generation Plastic.” In fact, students in their final year of college carry an average credit card balance of $2,864, according to Sallie Mae. Make paying off your debt a top priority. Large amounts of debt can negatively affect your credit score which can prevent you from receiving additional lines of credit at reasonable rates in the future, such as an auto loan or mortgage. In addition, prolonging payments means that you could end up shelling out hundreds or even thousands more dollars in interest down the road.
Do start thinking about retirement – It’s never too early to save for retirement. Sign up for your employer’s 401K plan as soon as you are eligible. It’s one of the smartest money moves you’ll ever make. Money is taken out of each paycheck automatically, and it will grow tax-free. Often times, employers match your contributions, so you are essentially receiving free money. Mutual funds and IRAs can provide an additional financial cushion for retirement and they don’t require large sums of money to open.
Do start an emergency fund – A common financial mistake among young adults is that they don’t stash away any cash for emergencies. Illnesses, car problems and job losses are just a couple of life’s unexpected turns that require extra funds. Try to save up at least three months of living expenses in an interest-bearing savings account and don’t touch your stash unless it’s really an emergency.
Don’t become “house poor” – There is no need to rush into purchasing a home right out of college if you can’t afford it. Traditionally, your mortgage payment should be no more than 30 percent of your income. Your total mortgage payment, combined with your monthly debt payments, should not exceed 36 percent of your income. But keep in mind, a mortgage is only part of the picture.
Other expenses include utility bills, yard work and unexpected maintenance and repairs. If a mortgage isn’t in your budget now, start saving. Take a fixed amount of money from each paycheck and deposit it into an interest-bearing savings account to use as a “house fund.”
Don’t buy a new, fancy car – While many grads are on the path to financial success, it’s important not to get to hasty. Throwing down hundreds of dollars a month on a car payment isn’t a smart money move if you can’t easily cover daily expenses, rent, savings, 401(k) and extra cash for entertainment. If you need a car, shop for a used one. You might also consider locating near public transportation. It’s cheaper than owning a car and it’s better for the environment.
Don’t be afraid to ask for help – The road to financial freedom is often fraught with obstacles. If you have questions or feel overwhelmed with your finances, seek the advice of a credit counselor. Visit www.bbb.org to locate a reputable agency.
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