Top 7 Financial Pitfalls for Recent College Grads And How To Avoid Them

So, you just graduated college, and you think you have the world at your feet?

Well, that’s true to an extent — but you also have to deal with a high unemployment rate, companies leery of hiring full-time staff because of Affordable Care Act restrictions and an economy that’s less than robust. For all of those reasons, it’s important that you don’t fall into one of the financial pitfalls that trip up many college graduates.

Read on to learn how to steer clear of them…

1. Not Living Off of a Budget

If you don’t create a budget right after graduating college, you’re simply kidding yourself if you ever expect to have any sort of long-term financial success. A budget is a must – it’s plain and simple. (Tweet this thought.)

Whether you use an Internet-based service like Mint or write out all your expenses and income on a piece of paper, the goal is to make sure you’re spending less than you make each and every month.

2. Spending Too Much of Your New Paycheck

Going from having no income whatsoever during college to having a steady paycheck after graduation is a transitional process. But in the midst of all your excitement, make sure you’re spending within your means.

Avoid getting the latest and great mobile device, and forget about that 90-inch flat screen TV until your finances have evened out a bit. You might have moving expenses to deal with or even financing a new work wardrobe. You’ll have more than enough time and money to make these purchases after a few pay increases or promotions.

3. Failing to Understand the Importance of Retirement Savings

The age at which you decide to start saving for retirement has a huge effect on how much you’ll have when it comes time to retire. Use any online calculator you can find, or check out these numbers:

Graduate A starts savings $5,000 a year with a pre-tax annual return of 7% and a 25% marginal tax bracket. When that graduate turns 65, they’ll have $675,861. Graduate B does the exact same thing, but waits until age 35 to get started and ends up with $365,022 — a difference of over $300,000.

Do not put off saving for retirement. Make it a line on your budget, and commit to monthly contributions or participate in your employer’s 401K program and invest as much as you can possibly afford.

4. Thinking Credit Card Debt Is Okay

Credit card debt is not okay. Commit to never carrying a balance, pay for all your purchases in cash if you must or adopt a really simple rule: If you can’t afford to pay for something in full by the end of the month, then you simply can’t afford it.

5. Avoiding an Emergency Fund

An emergency fund is important. You never know when a car breakdown or medical emergency is in your future. Even if you only devote $50 each month to this budget category, it will be worth it.

Understand that major car repairs or medical expenses can easily run into the thousands, and a job loss could really sting without a safety net. Start off modestly if you have to, but your ultimate goal is nine months’ worth of living expenses.

6. Not Worrying About Saving on Monthly Bills

Bundle your Internet, TV and cell phone plans to save money. Check out the data plan options with your smartphone carrier and see if you can drop down a tier or two. Clip coupons to cut your food bill. Every penny you save is one more penny you can use somewhere else — like your student loans.

7. Putting Off Paying Your Student Loan Debts

Thinking that your student loan debts aren’t important or can be put on the back burner is a bad strategy to take. They will be with you until you pay them off. Put them at the top of your list of bills to be paid, and send in more than the minimum. Get these debts in your rearview mirror as soon as possible.

Final Thoughts

Look, graduating college is great. You hopefully have already found work and are bringing in a steady and solid stipend. But that’s no reason to throw caution to the wind.

The financial decisions you make right out of the starting blocks will have a big effect on your overall financial picture going forward. Keep costs in mind from the get-go and get (or keep) yourself debt-free throughout. That’s the best strategy to take once you begin your professional career.

Are there any other financial pitfalls you can think of for college students to avoid? Share your advice in the comments!

David Bakke is regular contributor to Money Crashers and an Atlanta resident who has built up a huge passion for personal finance through his own personal struggles getting into (and out of) $50,000 in debt. He is an author of a personal finance book and experienced small business owner. He loves to help people with tips and strategies to tackle their own financial or business issues. In his free time, he enjoys spending time with his wonderful son.

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