So, you’re a college grad. Now what? Stepping into the real world can be scary, especially when you’re on your own financially. The mere thought of adulting is daunting enough—but don’t stress. Below are five tips for managing your money as a new college graduate:
1. Know the 50/30/20 budget rule
The thought of budgeting can be intimidating, and it’s hard to know where to begin. The 50/30/20 method is an excellent starting point, as the rules are pretty self-explanatory. If you’re unfamiliar with this method, you’ll start by dividing your after-tax income into three categories: needs, wants, and savings.
50% of your budget will be allocated for needs, like rent, groceries, transportation, utilities, and insurance. 30% of your budget will go towards wants, like shopping, gym memberships, dining out, or entertainment. Lastly, 20% will be set aside for savings, like an emergency fund or (eventually) a down payment on a house.
2. Practice small but good financial habits
Experts say it takes an average of 59 days to form a habit. So, for the next two months, start implementing small but good financial habits. Some examples:
- Monitor your accounts regularly. Set an alarm at the same time daily to review your accounts and ensure you know what money is coming in and what’s going out.
- Know (and monitor) your credit score. You’re entitled to one free credit report annually from each of the three credit bureaus. Georgia residents are entitled to two additional free reports each year. Many credit card companies also offer the ability to check your score for free on a more frequent basis (without impacting your score). These scores give a basic level of insight to your score, so it can vary between the models other lenders use. It’s still worth monitoring, though, because it can alert you to any significant changes.
- Pay off your credit card as often as possible (and for the highest amount possible). Credit cards have higher interest rates compared to other loans, so it’s best to keep your balance low and pay as much as you can.
3. Start saving for retirement ASAP
You’re never too young to start saving for retirement. Does your job offer a 401(k) with employer matching? If so, you want to take advantage of that, or else you’re leaving free money on the table. When an employer matches your contributions, they add a certain amount in addition to what you contribute (often up to a certain limit).
For example, your company may elect to match 100% of your contributions up to a percentage of your compensation. Let’s say your organization offers a 100% match up to 6% of your annual income. If you earn $60,000 per year, the maximum amount your employer will contribute is $3,600. To maximize this, you must also contribute $3,600 annually. If you contribute more than 6% of your salary, the additional contributions are unmatched.
This varies by organization, so it’s best to refer to your employee handbook for your company’s policy.
If your company does not offer retirement benefits, you can also invest in a Roth or traditional IRA. A Roth IRA allows you to contribute after-tax dollars to a retirement account, so your account grows tax free. With a traditional IRA, you contribute pre- or after-tax dollars, but your money grows tax deferred. You would then pay taxes upon withdrawal. If you’re unsure about which account works best for you, consider speaking with a financial advisor. Georgia’s Own offers consultations with a financial advisor at no cost and with no obligation.
4. Build your credit score
Having a good credit score is essential for many tasks you’ll tackle as a recent graduate, like renting an apartment or opening a credit card. Your credit score is determined by the following factors:
- Payment history: Whether you’ve paid past accounts on time
- Amount owed: How much you owe across all accounts (this is also referred to as utilization, which you want to keep below 30%)
- Length of credit history: The age of your loan accounts that show up on your credit report
- New credit: How often you apply for new accounts
- Credit mix: The variety of credit products you have (credit cards, auto loans, student loans, etc.)
If you don’t have a good credit score, there are a few ways you can build your credit. You should pay your bills on time and lower your debt. You should also leave any old credit cards open, especially if they don’t have an annual fee. Closing credit cards can ding your credit score. You may need to make a purchase every six months or a year—some lenders will close credit cards if they have been inactive for a period of time, with or without notice. However, if you’re paying a large annual fee to keep the card open, it may be worth risking a slightly lower score instead of paying tons of money for a card you don’t use.
5. Don’t rent outside your means
Social media makes it easy to keep up with friends—but it also makes it easy to compare ourselves to others. You may see your friends showing off their fancy new apartments or condos and think you need to do the same, too. But, housing is an enormous expense and could derail your budget if you live above your means. Let’s face it, you want to have the option to go to dinner with friends or see your favorite band in concert, rather than throwing most of your paycheck towards rent to keep up with the Joneses!
Typically, you should spend no more than 30% of your gross (pre-tax) monthly income on housing. That said, housing costs vary regionally. Evaluate your budget and income to determine how much you can comfortably afford.
Graduating college is an exciting time, but navigating the real world can be challenging, especially with new added financial responsibility. The decisions you make now will shape your financial future—but with the above tips, you can take charge of your money and be confident in your adulting abilities in no time.
