This article originally appeared on Financial Pilgrimage and has been republished here with permission.
Dear College Graduate, Congratulations! You did it. You now have a fancy piece of paper saying you’re skilled in your college major. For the past twenty years, you’ve been in school to prepare you for your life ahead.
You’re moving from a world where failure is punished, creativity is often limited, and all that matters is the grades you get on a test or paper. You’ve learned to navigate this environment successfully if you’ve made it this far.
You will now be entering a world of unknowns. A world where you can’t get by on intelligence alone. To become successful, you’ll need to take calculated risks, learn from failures, build effective relationships, and thrive in a world where the exact path isn’t laid out for you.
Letter to New College Graduates about Money
I remember being in your situation, and it can be terrifying. I graduated without any professional internships or other relatable experience. Getting interviews wasn’t usually a problem. However, there was always that awkward moment when the interviewer asked about my relatable experience. Without any experience, I stumbled through the responses, and the interview often ended shortly after that.
After many frustrating interviews that didn’t go as planned, I decided to go to graduate school, where I was fortunate to get a professional internship. A professional internship on my resume closed the gap and allowed me to find an entry-level position at a great organization after graduating.
Now I’m here to share my money advice for recent college graduates. I know more individuals are graduating from college later in life. However, for the sake of this article, let’s assume we’re speaking to the traditional college graduate. A person in their early-to-mid 20s has just started or is interviewing for their first “real” job. For individuals in this situation, you have one massive advantage on your side. TIME. Below is my advice.
Minimize Lifestyle Inflation
For the past four or five years, you have lived like a college student. That may have included eating ramen noodles, living with several roommates, and occasionally gathering loose change to buy a gallon or two of gas. You dreamt about having a real job with an actual paycheck, so you could start living like an adult. Newsflash, living like an adult can be overrated.
The typical adult lives paycheck to paycheck, trades time for money, and accumulates hundreds of thousands in debt. As a result, many adults end up in jobs they hate and get stuck because they have to pay for their nice cars and mini-mansions. If you’re already used to being broke, don’t increase your lifestyle to match your new paycheck.
Try to live like a college student for as long as you can. If you get a raise at work, no matter how big or small, put the majority of it towards savings, debt paydown, or investments. Deciding to limit lifestyle inflation before you make decent money will set you up for financial success in the future. You can still spend money on the things that are important to you, but do it in a very intentional way.
Related read: What’s a Good Credit Score for a College Graduate?
Automate Your Finances
My wife and I have paid off nearly $200,000 in debt since 2011 without a budget. Many financial experts will say that a budget is the cornerstone of personal finance. I don’t necessarily disagree. However, budgets added a level of complexity to our lives that we didn’t want to deal with. So what’s the alternative? Automating your finances!
Our savings, debt payments, and investments come directly out of our paychecks every month. We don’t even see the money. We then pay all of our bills for that pay period within a couple of days of receiving our paychecks. Then, whatever is left over in our bank account can be spent on whatever we want.
Automating your finances can be a substitute for a budget if done right. This approach will require more self-discipline, so you’ll have to know yourself before going this route. Having a little money in savings will help when you spend more than anticipated.
Related read: How to Start Building Credit as a Recent College Grad
Start Investing in Retirement Accounts
I know financial experts such as Dave Ramsey will say to hold off on investing in retirement accounts until all debt is paid and you have a solid emergency fund. Paying off debt and building a six-month emergency fund could take years to achieve.
Your early years of investing are most critical when it comes to saving for retirement. Therefore, you need to get started as early as possible. The benefit of investing $100 is exponentially greater at 22 years old compared to 32.
When you get that first job, check to see what retirement account options are available in your organization. If your company offers a match, do your best to take advantage and invest at least up to that amount. Not only will you benefit from the long-term benefits of compound interest, but you’ll also receive a 50 to 100 percent return on your money immediately with a company match. If your company does not offer a 401(k), pension, or another related account, consider putting money into an individual retirement account (IRA).
Get started even if you can only invest $25 a month. Getting started will put you in the habit of investing to hopefully increase your contributions as you reduce debt or increase income.
Pay Off Your Debt
I know what you’re thinking. How in the world am I supposed to start paying off debt with my first real job? I have to worry about getting a place to live, transportation, food, AND start saving for retirement? How can I do all of this on a starting salary?
The answer is you may have to put off paying down debt until you can find opportunities to increase your income or reduce spending. When my wife and I started on our debt paydown journey, I was early in my career at a quasi-governmental organization, and my wife had gone back to school to become a teacher. We were still taking out loans to pay for her schooling and felt like we were doing nothing but treading water. Regardless, we set a strong financial foundation to build upon as our income increased.
Besides a modest mortgage, car payments, and other bills, we still tried to live like college students as much as possible. We weren’t perfect, but we did resist the urge to buy a bigger house or expensive cars. When my wife got her first public school teaching job, we put her salary towards student loans.
Similarly, as I have advanced within my organization, most salary increases have gone to pay off our mortgage. The important point is even if you aren’t paying debt immediately, do your best to set the foundation. So, you can increase the gap between income and payments as your income increases.
Money Advice for Recent College Graduates
I know that being a recent college graduate can come with many unknowns. You’ve probably looked at available jobs that require three or more years of experience and thought, “how can I get experience without experience when every job requires experience?”
Finding that first job can be challenging, especially in a world where income inequality increases and wages for entry-level positions remain relatively stagnant. The good news is you have time on your side. Set a strong financial foundation now!
Make a promise to yourself to keep lifestyle inflation low if your income increases in the future. Automate your finances, so you don’t ever see the money in savings or monthly payments. If you’re fortunate enough to get a job with a retirement plan, start putting money away now. Then if you can, start doing everything you can to pay off your debts.
This may not all be doable at once. However, if you set the foundation, you’ll be in an excellent position to achieve these goals, especially if your income increases in future years.
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