Five Financial Tips for New Graduates

This episode is for new graduates or anyone who needs some real-world financial tips!

Do you ever reflect back to an earlier time in your life and think, I wish I knew then what I know now? One of the reasons I love doing this podcast and teaching people about personal finances is to help them get started on the right financial path as early as possible. Are there some lessons I wish I had learned sooner, rather than later, when it comes to personal finances? You bet! Last week we covered paying off student loans.  Today, I’ll share five tips that can help anyone get a leg up on their financial future.  In episode 178, I’ll expand on these and list some other financial tips new graduates — or anyone just starting out — can use.

Tip #1: Build an Emergency Fund

The most basic and important rule for personal finances is to be prepared for the unknown. And you know there’s plenty of that in today’s turbulent economy. So, no matter how much money you start earning, tip number one is to quickly build an emergency fund. Think of an emergency fund as your investment in yourself. It’s how you’ll stay calm and cool in the face of a potential crisis like a broken-down car, an unexpected medical bill, or a job lay-off, for example. Once you start building a cash reserve, be disciplined with it. Never take money out for anything other than real—let me repeat, real—emergencies!

Consider saving anywhere from five to ten percent of your income for your emergency fund. You should keep it in a safe place, such as a savings account at an FDIC-insured institution. I recommend that you save enough to cover a minimum of three to six months worth of living expenses. Some higher-yield savings accounts and money market deposit accounts will require minimum balances. So as you accumulate more money, you’ll have more options to earn higher interest rates. For example, you may have heard of ING, at ingdirect.com. Right now they offer a money market account with 1.5% annual interest for accounts with a one dollar balance. But if you have $2,500 to put away, you can earn 1.75% at Discoverbank.com. There are many more options for higher rates that you may find locally or nationally. Bankrate.com is a great resource to start your account search.

Tip #2: Save for Retirement

Tip number two also has to do with saving, but this money will be for the long-term. Yes, you guessed it—this tip is to save for retirement. That should be your next priority after you’ve accumulated a healthy emergency fund. You might be thinking, hey, I haven’t even found a job yet, why should I be worried about what’ll happen 40 years from now. The answer to that question really 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.

It’s important to save in government-sponsored retirement accounts whenever possible, because they help to reduce your tax liability. Just about anyone who has taxable income can open up an Individual Retirement Arrangement or IRA. And if you’re lucky enough to be able to participate in a workplace savings plan such as a 401(k) or a 403(b), never, ever pass it up! Participation is especially important if the employer offers a savings match, because that’s free money. So you’ve got nothing to lose and a cushy retirement to gain.

For much more on all types of retirement accounts and how to pick your investments, be sure to get my new audiobook, Money Girl’s Guide to Retirement Planning. You can find it in the iTunes store or at Audible.com.

Tip #3: Snub Wasteful Spending

Tip number three comes straight from the heart, because I could have done a much better job in this category early in my career. It’s to snub wasteful spending. Many new graduates are so happy to be out of school and earning their own money that they go a little crazy. It’s easy to start excessive and wasteful spending habits that give you fleeting joy but long-lasting debt! The new daily grind might leave you thinking, I deserve this luxury apartment or that shiny new thing. At the risk of sounding like one of the preachy professors you just got away from, the saying “a penny saved is a penny earned” is true. In fact, the reality is that you can turn a single penny into many pennies if you invest it wisely. 

Tip #4: Discard the Credit Card

Tip three segues nicely into tip four: Discard the Credit Card. That’s because credit cards are usually the vehicle that makes wasteful spending so easy in the first place. If we always had to fork over cash to buy a little more of this, or some of that, it’s likely that we wouldn’t buy it at all. Don’t let your ability to get credit cards turn you into someone who abuses them.

It’s a good plan to have a credit card tucked away as part of a strategy to deal with emergencies. It can supplement your emergency fund if you find yourself in a serious pinch. And if you’re extremely disciplined and always pay off credit card balances in full each and every month, they can be useful tools with great benefits. But getting cash back rewards and airline points will actually end up costing you much more in interest charges if you don’t pay off your balance in full every month.

Remember that if your bank account isn’t flush enough to buy something with cash, check, or a debit card, you can’t afford to buy it with a credit card either. It might seem like loads of fun to go on a wild spending spree; but the debt hangover is too painful and lasts way too long.

Tip #5: Establish Good Credit

Another benefit to responsible credit card use is that it helps you accomplish tip number five: establish good credit. One of the challenges new grads and young people usually face is that they have little or no credit history (I’ll devote a future episode to building credit for the first time). Many of your recurring bills can report your payment habits to credit bureaus. A late payment on your student loan or to a utility company can damage your credit score no matter how valid your excuse may be.

Paying off a small credit card balance on time each month is a great way to slowly raise your credit score. It helps prove that you’re a worthy credit risk for a loan, such as a mortgage, when you’re ready for it. An impressive credit score also helps you get approved to rent a place to live, get lower insurance rates, and qualify for employment at certain stringent companies. So be sure to stay on top of your bills and pay them on time. 

Now that you’ve made it through school, make your personal finances a top priority. How much you make isn’t as important as how you manage your money on a day to day basis. It just comes down to sensible use of your precious financial resources.

Again, for an some additional finance tips for new grads check out episode 178.

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Chi-Ching, that’s all for now, courtesy of Money Girl, your guide to a richer life.