6 Tips for College Grads to Manage Money Like a Grownup
There’s no reason the end of college life has to mean the beginning of money stress. Here are six fundamental tips you can apply now to set yourself up for a lifetime of financial success.
Congratulations to all the new graduates! No more cramming for exams, living in cramped quarters, or eating bad cafeteria food. You’ve got a lot to look forward to. But you might also be feeling a little stressed about your future and finances, especially when it comes to how you manage money.
How you handle money over the next few years is incredibly important. If you learn some fundamental rules of personal finance now, applying them will set you up for a lifetime of financial success.
Here are six tips to help new graduates (or anyone who wants money advice) manage money.
6 Tips for College Grads to Manage Money Like a Grownup
- Set up the best bank accounts.
- Build your emergency fund.
- Understand your student loans.
- Know how to build great credit.
- Avoid dangerous debts.
- Start investing sooner rather than later.
Let’s take a look at how each tip that can help anyone get a leg up on their financial future.
1. Have the best bank accounts.
One of the first things you should do after graduating is make sure you have great checking and savings accounts. The accounts that you had while in school might not be the best ones to keep.
Bank accounts lay a foundation for your money management system, so they need to give you lots of benefits. Look for a bank or credit union that offers
- A great mobile app
- No monthly fees
- Easy transfers
- Free bill pay, and
- Remote deposits
Visit Bankrate to compare the best FDIC-insured accounts available for your location or nationwide. I’m a huge fan of USAA, which operates only online, offers military benefits, and has a best-in-class mobile app. Shop around to see what makes sense for your lifestyle and financial situation.
2. Build your emergency fund.
Learning how to handle money wisely can be challenging for new graduates. My best advice for starting off on the right financial foot is to begin building an emergency fund with your very first paycheck.
If you can set aside small amounts over time, such as $100 a month, you’ll have more than $1,000 in a year. You’ll be prepared for unexpected expenses, such as car repairs, last-minute travel, or medical bills that aren’t covered by insurance.
Think of an emergency fund as an investment in yourself. It’s how you’ll stay calm and cool in the face of a potential crisis like losing your job.
Make a goal to slowly accumulate at least three to six months’ worth of your living expenses in a savings account. Consider saving 5% to 10% of your income until you reach that goal.
Think of an emergency fund as an investment in yourself. It’s how you’ll stay calm and cool in the face of a potential crisis like losing your job. Once you start building a cash reserve, don’t touch it unless you face a serious financial crisis. Emergency funds are not for shopping, going on vacation, or anything else that you could truly survive without.
So, no matter how much or how little money you start earning, make building a cash reserve a top priority. Being financially responsible means never, ever getting caught without an emergency fund.
3. Understand your student loans.
The next assignment for new graduates is to take a hard look at any student loans you have. Review their terms, conditions, and various repayment options.
For instance, Stafford federal loans give you until six months after graduation to start making payments. If you haven’t landed a job or find that your loan payment is too high relative to your income, investigate alternatives.
The standard repayment plan for federal loans requires fixed payments that get your balance paid off within 10 years, or 30 years for consolidation loans. However, there are a variety of repayment options that may be available for certain federal, private, or consolidated student loans.
- Graduated repayment allows you to make lower payments at first, but then they increase every couple of years so you repay the debt within 10 years (or up to 30 years for consolidated loans).
- Extended repayment gives you up to 25 years to repay a loan and provides a substantially reduced monthly payment.
- Pay as you earn repayment (PAYE) allows your payments to be 10 percent of discretionary income, but not more than you’d pay with a 10-year standard repayment plan.
- Revised pay as you earn repayment (REPAYE) allows your payments to be 10 percent of discretionary income.
- Income-based repayment (IBR) allows your payments to be 10 or 15 percent of your discretionary income, but not more than you’d pay with standard repayment.
- Income-sensitive repayment allows your payments to be based on income and to be repaid in full within 15 years.
- Income-contingent repayment (ICR) allows your payments to be the lesser of 20 percent of your discretionary income or the amount you’d pay on a fixed repayment plan over 12 years.
Payments for income-based plans are recalculated each year based on your updated earnings and family size. Also note that if you’re married, in most cases, both of your incomes are factored in, whether you file taxes jointly or separately.
In addition to alternative repayment options, you may qualify for a loan deferment if you’ve hit a financial rough patch due to an illness, disability, or job loss. A deferment allows you to temporarily stop making payments for a set period of time. However, interest may still accrue, depending on the type of loan you have.
Don’t forget that if you choose an alternative repayment option for your student loans, you typically pay much more in interest over the long term.
Don’t forget that if you choose an alternative repayment option for your student loans, you typically pay much more in interest over the long term. Even though you make lower monthly payments, you pay interest for a longer period of time, which really adds up.
However, when your financial situation improves, you can always prepay your student loan at any time without penalty. You can make a lump sum payment or send more than the minimum payment each month to reduce the cost of your student loan debt.
If you’re still paying federal student loans after 20 or 25 years, you may be eligible for loan forgiveness, depending on the type of loan you have.
Always notify your lender if you’re having trouble making student loan payments on time. They can discuss your situation and help you evaluate your options.
4. Know how to build good credit.
New graduates may not have much credit history, which means you probably have no or low credit scores. But don’t worry, it’s easy to build good credit over time.
Your credit reports are like financial rap sheets, which are maintained by nationwide credit agencies including Equifax, Experian, and TransUnion. But thankfully, they reveal your good financial behavior as well as the bad. Your credit scores are calculated from the information in your credit reports.
High credit scores tell lenders and merchants that you’ve been responsible with money. A good credit history comes with privileges such as low interest rates on loans and credit cards, which can save you a bundle.
High credit scores tell lenders and merchants that you’ve been responsible with money. A good credit history comes with privileges such as low interest rates on loans and credit cards, which can save you a bundle.
But low scores mean that you won’t qualify for credit or that it will be expensive. And poor credit can trip up other areas of your financial life even if you never borrow a dime.
Your credit affects the rates you’re quoted for auto, home, and renters insurance. It’s a factor in promotional offers you receive and in security deposits you pay for utilities and cell phone contracts. Credit can even play a role in how potential employers evaluate you.
The easiest way to establish good credit is to pay bills on time. If you have a credit card, making charges that you pay off in full each month is a great way to slowly raise your credit score. If you can’t qualify for a regular card, using a secured credit card that reports payment information to the credit agencies is a foolproof way to kick-start your credit history.
5. Avoid dangerous debts.
Once you have credit, it can be tempting to use too much of it.
Every new graduate needs to respect debt. It’s a powerful financial tool that can help you build wealth when used the right way. For instance, you can use low-interest debt to get an education so you earn more over your lifetime, or to buy a home that appreciates in value over time. But if you use high-interest consumer debt—such as credit cards and payday loans—to finance a lifestyle that you can’t afford, it can be devastating to your financial life.
To learn more about eliminating all types of debt and creating the financial future you deserve, check out the audiobook version of Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love.
6. Start investing sooner rather than later.
The last tip that many new graduates don’t appreciate is to start investing for retirement sooner rather than later. You might be thinking, I haven’t even found a job yet; why should I be worried about retirement?
The answer boils down to the power of compounding interest. The earlier you start saving, the less you’ll need to save over time. That’s because the magic of compounding allows you to earn interest on your interest, and that gives you a lot more bang for your buck.
The earlier you start saving, the less you’ll need to save over time. That’s because the magic of compounding allows you to earn interest on your interest, and that gives you a lot more bang for your buck.
Let’s say you’re a smart new graduate who works in human resources for a Fortune 500 company. You sign up for the 401(k) retirement plan and contribute $50 a week. If you never increase your contribution and earn an average 7% return, after 40 years you’d have a nest egg worth over half a million dollars. That’s impressive, considering you only contributed $104,000 ($50 a week x 52 weeks in a year x 40 years) of your own money.
Choose to invest through tax-advantaged retirement accounts whenever possible, because they reduce your tax liability. If you’re lucky enough to have a workplace retirement plan (such as a 401(k), 403(b), or 457) never, ever pass it up! Participation is especially important if the employer offers matching, which is free money.
And just about anyone who has taxable income can open up an Individual Retirement Account or IRA. To learn more about the different types of retirement accounts and the best places to open them, download the free Retirement Account Comparison Chart.
Being young doesn’t mean you have to be foolish. It’s easy to start off on the right financial foot by building an emergency fund, getting a handle on student loans, avoiding debt, and investing for your future as early as possible.
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If you’re graduating, or you know someone who is, there is a great graduation present that you can enter to win right now. Quick and Dirty Tips is running an exclusive sweepstakes to win an amazing book bundle. It includes books like Jamie Oliver’s cookbook 5 Ingredients, and 50 Rules Kids Won’t Learn in School by Charles J. Sykes. Just think of it as a starter pack for life after college. Enter for your chance to win here. Good luck!
Teacher With Graduate Students image courtesy of Shutterstock
About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.
