15 Money Management Tips Every Recent Grad Should Memorize
To help the newest crop of graduates have a brighter financial future, money management experts offer their best advice.
Ready? Set? Go (NOW)!
Virtually every money manager agrees: Don’t wait another moment to start thinking about your finances. “It’s never too soon for young people to start thinking about managing their finances—no matter how difficult that is to contemplate when they’ve just graduated,” says Krista Neeley, a regional vice president of Appreciation Financial a financial services company.
Live on less
Of course, starting to save may be easier said than done. “After four or five years of delayed gratification [during college], there is great temptation to pursue a lifestyle,” says Vic Patel, founder of Forex Training Group. “The problem is, when you have no real purpose for your money other than chasing a lifestyle, you end up using every extra dollar you earn in the pursuit of more.” Patel suggests, instead, a policy of consciously “living beneath your means. Allow some of the frugality you learned in college to spill over in real life…It’s a habit that will serve you well.”
Learn to budget
To begin the process, new graduates might consider what wealth manager, Ron Kloth of Wealth Manager at Dynamic Wealth Advisors refers to as “Dynamic Programming.” Dynamic Programming is a system of “budgeting in reverse” by totaling up all “fixed” expenses like rent, insurance, phone, etc. and deducting it from the dollar amount of the next anticipated paycheck. What remains is a hard and fast number to be divided between discretionary spending and savings.
Don’t underestimate the expense of eating out, suggests Larry Kallevig, CEO of Haven Financial Group. Even if you’re eating fast food, it can add up. Bringing your lunch and eating in a few times a week will make a big difference. “In fact, if you pack your lunch three times a week and invest your savings, you can save more than $9,000 in seven years.”
“It’s easier than ever to shop for used or consigned goods; Facebook even has a garage sale community page,” Kallevig says. Also, don’t automatically pay full price for everything; use the Internet to save money on everything, advises consumer savings expert, Andrea Woroch. “For clothing, check out sites like Tradesy, Thredup.com, and eBay. For home goods, check OfferUp or a local consignment shop. There are so many options. Get in the habit of comparing prices and shopping sales racks. Learn to love generics! There are so many options to save when it comes to buying necessary items like home goods, clothing for work and so on.”
Don’t pay too much in rent
“The cost of rent is skyrocketing. Keep in mind that your rent shouldn’t be more than 30 percent of your monthly income,” Kallevig says. Consider taking on a roommate to split the cost or think about moving closer to work to cut down on extra expenses like gas. Or ask mom and dad if you can move home for a while—at least until you get some of your student debt paid off.
In creating a budget, new grads should consider earmarking as much as 10 percent of their take-home pay as savings as a fixed expense. Neeley suggests looking at it as a way of “paying yourself. It’s money you earned, and money you deserve to have.” If this seems difficult, Neeley suggests thinking of it as “strategic money placement,” instead of as a “loss.”
Create an emergency fund
Yes, it’s more money out of “disposable income,” but new grads need to start now building a savings cushion. “Building an emergency fund should be a high priority,” advises Carla Dearing, Wall Street veteran and founding CEO of SUM180, an online financial wellness service. “Unexpected expenses happen all the time, but if you have a cushion of savings, unexpected expenses won’t derail you. Instead of draining your long-term savings account or falling into debt, you can simply use your cushion to stay on track, then rebuild your cushion for next time.” As for how much to set aside, Dearing suggests aiming for enough cash in reserve to cover six months’ worth of expenses.
It’s not enough to simply have health insurance, you should also consider disability insurance, according to financial advisor Steven Crawford. “Disability insurance guarantees a steady stream of income should an unexpected illness or accident prevent you from being able to bring home a paycheck.” Some employers offer disability insurance in their benefits plans, but Crawford recommends purchasing disability insurance even if it is not specifically part of an employee benefits plan.
Start saving for retirement (yes, now)
Speaking of employee benefits, if your company offers a 401K plan, start contributing to it now. The money is typically automatically deducted from your pre-tax paycheck and is a simple and virtually foolproof way to ensure that you’re saving. “They allow you to save for the future without even seeing the money leave your bank account,” Neeley points out. Even better if the employer makes matching contributions, points out Cheryl Nash, president of Investment Services for Fiserv, who sees matching contributions as “free money” to start building a nest egg for the future and reach your long-term goals.