How to Manage Money After College
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You’ve officially graduated and now you’re ready to embark on a new journey of post-grad life. This is a super exciting time in your life and you should be proud of all you’ve accomplished. However, before you start celebrating, it’s important to recognize that not only will you be experiencing a massive shift in lifestyle, but you’ll also be experiencing a change in money management. How to manage money after college is an important life lesson. Learning strong financial lessons at an early stage will help set you up for a more successful future.
As a former college student myself, I remember the difficulty in navigating a new sense of financial freedom alongside the burden of student loans. If you are lucky enough to graduate without student loans, you can still benefit from these tips on how to manage your money after college.
1. Get organized
The first step in any new phase is to get organized. Once I secured my first job post-graduation, I laid out all my bills and student loans. Like any other process in budget management, I had to familiarize myself with reality. Through this process I was able to lay out my monthly expenses, and figure out how much I could reasonable save every month.
2. Set a debt repayment plan
If you graduated with student loans (which many of us did), this is a necessary step to gain control of your finances. If you’re like me and took on federal loans, you likely have a few repayment options including fixed plan where you pay a set amount every month, or a variable plan which is either based on a person’s income (usually 10-15%) or a graduated plan which increases your payments every 2 years. When electing a plan, thinking about a few things. Consider how much you can afford each month. Naturally a higher income warrants a higher monthly payment. Consider also how long you want to be paying student loans. Lower monthly payments each month will lessen your financial burden in the short term but will increase your overall payments in the long term with higher interest. Note you can change your plan whenever you need to for free. (1) Many repayment plans will also allow you to auto-debit. I recommend enrolling in one of these plans which enable you to never miss a payment and potentially even get a break on the interest. For a full overview on repayment plans, check out the Federal Student Aid website.
3. Create an emergency fund
Unfortunately, those rainy days come around a lot more often that you hope. An emergency fund is to be used for those unexpected expenses including car repairs or medical bills. Creating a fund with 3-6 months of living expenses is a great way to get started on a smart money journey. DO NOT use this money for discretionary spending. It’s for emergencies only. One great option is to utilize a high-yield savings account. High yield savings account will offer a higher interest rate than traditional banks so your savings will work harder.
4. Take advantage of employee retirement benefits
401k plans have gradually replaced pensions since the 80s. The tax-deferred retirement plan allows employees to contribute to the plan tax-free. Many employers will also match those contributions at an average of 4.3%. (2) If your financial circumstances allow for it, I recommend contributing to the plan. While I advocate for early investment in retirement, there is good reason to set your debt repayment plan first. Many loans carry a heavy burden of high interest rates. My personal rule of thumb is that if you carry debt, you should only invest if the cost of debt is lower than the potential gain. To bring this to life, imaging a student loan debt carrying a 7% interest. If your investment fund will only yield 6%, I suggest wiping out your debt first. If you feel like you’re missing out on investments, just remember two things. At such a young age, you have many years before retirement to invest. You will gain and lose wealth between now and then. The second things to remember, is that aggressively paying off your loans early, will free up funds to invest. However, if you can invest in a retirement plan at work, do so to the maximum you can. The benefit of employee retirement plans is that you can elect in and out at any time and can adjust your contribute level at any time.
5. Invest!
This wouldn’t be a personal finance blog if I didn’t recommend investing somewhere in a post. I am a big fan of investing early and often. However, in order to invest you need to not just have the financial means, but the emotional tolerance as well. Investing should occur at a time when you have the financial means after clearing any costly debt and creating an emergency fund. To help you get started we have an article on investing tips for beginners. Investing early and often will put you leaps and bounds ahead of your peers. However, there is risk involved so only do so if you have the capacity. If you’re not ready to commit a large portion of your discretionary income in investing, you can try a smaller step with acorns (paid link). With acorns your spare change from everyday purchases via a connected account and gets put into an investment account.
Congrats again on this exciting time. Starting out on a strong financial path will help set you up for a lucrative future and hopefully early retirement! How to manage money after college does not have to be difficult. Some fiscal discipline combined with upfront planning will help set you on the right path. One final tip-automate as much of these contributions as you possibly can to ensure payments are made on time and that you keep on track.
Sources:
(1) Federal Student Aid. https://studentaid.gov/manage-loans/repayment/plans
(2) What is a Good 401k Match? Investopedia. Thomas Catalano. https://www.investopedia.com/articles/personal-finance/120315/what-good-401k-match.asp