Graduating college is a major life milestone that marks an exciting new chapter. As college grads say goodbye to academic life and start to navigate their future, determining what steps to take next can seem daunting. Despite all the late nights studying and countless hours spent in lecture halls, one thing you may not have learned in college was how to manage your finances.
When it comes to building your financial future, the earlier you start, the better off you’ll be. Whether you’re a new college grad or you just need to get your financial house in order, here are seven steps that will set you on the path for financial success.
Make a habit of budgeting. There’s something about the word “budget” that makes most people roll their eyes, but let’s flip that script now. Budgeting is your friend. It puts you in the driver’s seat of your financial future, so you can make informed decisions and achieve your goals. To create a budget, list out all of your monthly expenses, then subtract them from your monthly income. This will tell you if you’re earning more than you spend. If not, you’ll see where you need to make adjustments or cut back.
Get a handle on your student loans. Right away, figure out how much your student loan payments will be and when they are coming due. Some loans payments must begin as soon as you graduate, while others allow a short grace period (usually six months). If you can’t afford the monthly payment, talk to your loan servicer about setting up an alternative payment plan. Whatever you do, don’t ignore your student loans! Missing student loan payments can eventually damage your credit and impact your ability to borrow money again in the future.
Create an emergency fund. You may not think you need an emergency fund, until you have an emergency … like a job loss, car repairs, or unexpected medical bills. Putting those charges on a credit card is financially risky and should only be done as a last resort. Work toward building an emergency fund that will cover three to six months of living expenses. Refer back to your budget to see how much you can afford to save each month, and create an automatic savings rule to set that money aside for you.
Build credit. Credit refers to your ability to borrow money and pay it back at a later date. Most young adults have little to no credit history built up, but if you plan to buy a house or a car at any point in the future, you’ll need credit. To build credit, you have a few options: You can apply for a credit card and start putting small purchases on it, become an authorized user on someone else’s account, or take out a small personal loan. If you choose to open a credit card, be sure to pay off the balance in full every month! Credit card debt is a slippery slope that can be difficult to climb out of. Learn more about how to improve your credit.
Pay yourself first. When you’re just setting out to begin your career, thinking about retirement might be the last thing on your mind. But here’s the thing about saving for retirement: The younger you are when you start, the more time your money has to grow, thanks to the magic of compound interest. Here’s some math to prove it: Let’s say you start saving $300 a month at age 20. Assuming an annual average return of 7%, you’ll have over $1 million dollars in retirement savings by age 65. But if you wait until age 30 to start saving — only a 10-year difference — your retirement savings drops by half to about $500,000. If your employer offers a 401(k) match, make sure you’re taking full advantage of it; otherwise, you’re leaving free money on the table.
Start saving for a down payment. Buying a home is one of the most powerful ways to build wealth, and preparing for homeownership while you’re young can make that a reality for you even sooner. Besides, while you can buy a home with as little as 3% down (or even zero down in some cases), saving up a larger down payment can get you a better interest rate on your loan and help you afford a more desirable home. According to Freddie Mac, it takes young adults about 4-6 years to save enough for a 5% down payment. By saving now, you’ll be able to hit the ground running when you’re ready to buy.
Plan for home improvements. Repairs and maintenance are to homeownership like peanut butter is to jelly: They just go together. If you already own a home or are planning for a future purchase, be sure to save for repairs or upgrades. As your home goes through normal wear and tear over the years, you’ll need a cash reserve for home improvements, and having a nest egg available to dip into will help you avoid draining your emergency fund. Making regular repairs and improvements also protects your financial investment in your home and can help boost its value.