At Money Crashers, many of our readers are recent college graduates, and many of them have lots of questions. So, we’ve come up with a list of the five most common questions we are asked, along with the appropriate guidance to help answer each one.
Recent college graduates are presented with a whole new world of financial responsibilities, so read on to learn how to weave your way through the madness:
1. How Does a College Graduate Create a Budget?
Assuming you find work shortly after graduation, establishing a personal budget is rather simple. Use an online resource such as Mint.com if you’d like, or simply create a handwritten budget.
To do this, create two columns, recording your monthly income in one and your fixed monthly expenses in the other—this will include groceries, rent or mortgage, gas, electric, Internet, TV, cell phone and entertainment expenses. Your primary goal is to keep your spending beneath your income.
2. What Hidden Expenses Can Cause Problems for College Grads?
When making your budget, don’t forget to factor in prorated amounts for annual expenses such as auto insurance and auto registration fees, as well as retirement contributions. Sign up for your employer’s 401K program and have a significant amount contributed from each paycheck, or open up an individual retirement account and contribute the maximum of $5,500 for this year.
3. How Can Recent College Grads Reduce Expenses?
Bundle services such as Internet, cable TV and telephone to reduce monthly expenses. Clip coupons to save on groceries and minimize credit card spending, being certain to pay off all balances on time and in full each month.
And remember, if you can’t afford to pay the purchase off by the end of the month, then you just can’t afford it. Wait until you have enough money to make extravagant purchases, such as the latest smartphone or an 80-inch flat screen TV.
4. How Important Is It to Create an Emergency Fund?
The ultimate goal for recent college graduates should be to build an emergency fund containing nine months’ worth of living expenses. The job market is tight, and layoffs are still a possibility. Start your program slowly, but work toward reaching that goal. Including a line in your monthly budget for emergency fund contributions is a great way to go.
5. When Should College Grads Start Saving for Retirement?
Start saving for retirement as soon as you get your first well-paying job. Although retirement is a long time away and seems like something you don’t need to address, the power of compound interest is not to be taken for granted.
Consider this example, taken from Money Magazine : Graduate A saves $5,000 per year starting at age 25 in a tax-advantaged account, with an assumed 7% annual return. Graduate B does the same, but waits until age 35 to start. At age 65, Graduate A will have a bit more than $1 million set aside, while Graduate B will have only about $540,000.
You should participate in your employer’s 401K program and start an additional individual retirement account as soon as possible. Even if you’re just contributing a rather small amount, you’re still benefiting.
The most important thing to consider if you’re a recent college graduate is that you have to come up with a plan. By simply sitting down and devoting some serious thought to the topic of your finances, you’ll be sure to get off on the right foot.
Check out the Money Crashers’ “Careers” tab (located on the homepage) for more detailed information on the many challenges you’ll soon be presented with. We wish you the best of luck, and hope we can be there to help!
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