College gives you a chance to become independent and prepare for your postgraduate career.
But unless you major in money, you might graduate without learning “Personal Finance 101.”
Consider these five big money mistakes some new grads make so you can avoid making them yourself.
1. Falling behind on student loan repayment
The average Class of 2016 graduate left school with $37,172 in student loan debt. If you aren’t serious about your repayment, you could be on a path to delinquency or default. Interest will accrue on your loans while you wait to pay them off.
If you want a head start, make the most of your grace period — the six months all federal (and many private) loan servicers give you to prepare for your first monthly payment after you graduate.
To prepare, build your loan repayment checklist. It should include to-dos such as:
- Review your loan amounts and repayment terms.
- Set up autopay to make sure your bills are paid on time.
- Explore student loan consolidation and refinancing.
- Create a goal for finishing your repayment.
2. Spending on credit and without a budget
If you’re a new grad with a new income, you’re probably thrilled to have your own money and the ability to spend it any way you please. Without a budget, however, you might spend more than you earn.
The problem with using plastic to cover these costs is that credit cards have higher interest rates than even private student loans do. Unfortunately, their interest rates and repayment plans are less straightforward too.
Follow these rules of thumb when it comes to using credit cards:
- Spend only what you have.
- Buy only what you need.
- Pay off your balance at the end of each billing cycle.
Also Read: Which Budget Methods Are Right For You?
When you’re considering a purchase that falls into the “want” category, use a budgeting tool like Mint to ensure you can afford it. These free online tools can track and categorize every transaction you make so you’re not spending blindly.
3. Not saving money for a rainy day
Only 39% of Americans have enough savings to cover a $1,000 emergency, according to a Bankrate survey.
As a new graduate embarking on a career, you might think, “What could go wrong?” Unfortunately, a lot. Building an emergency fund is a great way to prepare in case things go awry.
Let’s say your first job out of college doesn’t pan out and you need money to tide you over until you find a new one. Having some cash in a savings account could give you room to breathe.
Build the fund a little bit at a time by rationing your paycheck or starting a side hustle for extra income. You could even set up a direct deposit so a portion of your earnings goes straight into the fund.
If you’re not sure how much money to stash away for the future, look at your budget and calculate a month’s worth of expenses. Then ask yourself how many months it’ll take you to recover your income if you lose your job. If your monthly expenses equal $2,000, for example, a three-month emergency fund would hold $6,000.
4. Forgetting to monitor credit reports
In many ways, credit is currency in the U.S. Without it, you’ll have trouble refinancing your student loans or taking out a loan to buy a car or home.
As a new grad, you could have a thin credit file. Paying your student loans, credit cards, and other bills on time will improve your credit score, as payment history accounts for 35% of it, according to FICO.
But it’s not enough to take note of your credit score while using a free service like Mint. Monitor your credit reports from the three main bureaus: Equifax, Experian, and TransUnion. You’re entitled to a free copy of each report annually, according to the Federal Trade Commission.
You’ll want to keep tabs on these reports because they affect your credit score. Dispute any errors you find to keep your score in tip-top shape.
5. Ignoring retirement savings options
If you’re in your early 20s, you might not be able to imagine being in your 60s or 70s and out of work. However, the more you save and plan for retirement now, the more likely you are to enjoy a financially stable future.
Part of the problem is experience. Among millennials, 30% say they haven’t remained at job long enough to start a retirement plan, according to a Bank of America survey. Your employer could require that you work for three months or longer before allowing you to join its 401(k) savings plan.
Also Read: How Much Should I Have In My 401k(k)?
A 401(k) allows you to dedicate a pretax portion of your paycheck to your long-term savings. It also comes with a company match if you work for a participating employer. Not contributing when you’re eligible is the same thing as leaving money on the table.
Set yourself up for a bright financial future
No one expects you to be a financial wizard right out of college. Sometimes, it takes making a few mistakes before you get the hang of managing money.
The key is to not make big mistakes you could easily avoid. So pay off your debt, save money, and monitor your credit. The future you will be grateful.
