8 money lessons for new college graduates

College graduation is an exciting time full of change and often some anxiety. Learning to navigate the world beyond school involves a sharp learning curve, including handling personal finances. Sticking to some foundational focus points can help you to stay motivated and keep from getting overwhelmed — while also establishing your long-term financial success.

8 personal finance tips for recent graduates

Graduating means leaving the school budget and structure you’ve been used to for several years. You’ll want to take a number of steps to help your personal finance journey as a recent graduate and set yourself up for success for years to come.

1. Protect your credit score

Your credit score is an important measure of your financial health, especially as a recent grad. A good credit score can make it easier — not to mention less expensive — to take out a loan, buy a car or rent an apartment. In some states, good credit can even save you money on your auto insurance premium.

If you don’t have a credit score yet, an easy way to establish one is to open a credit card and make regular purchases and payments. If you already have a credit score, do everything you can to protect it with smart credit management practices, such as:

• Paying your monthly bills in full and on time.
• Keeping your credit card balance low in relation to your credit limit.
• Spacing out applications for new credit.

You can and should keep track of your credit health by reviewing your credit reports. You can access those reports for free via AnnualCreditReport.com. If you find errors on your credit reports, federal law lets you dispute those mistakes with credit reporting agencies.

Takeaway: Your credit score will ultimately influence your ability to qualify for loans and determine the interest rates on your debt. Keeping track of your score and credit report annually is one pillar of maintaining overall financial health.

2. Make a budget and stick to it

A solid budget is the foundation for financial health. An organized budget can help you track incoming and outgoing expenses, optimize the money you have, manage debt and save for future expenses, like a car or a house.

When crafting your budget, first conduct a financial audit to establish goals that will hold you accountable. If you have a job lined up after graduation, calculate your monthly income after taxes. Then check your bank and credit card statements to calculate necessary expenses, including rent, utilities, insurance, food and gas.

Next, determine how much you spend on nonessential expenses, such as restaurant dining, entertainment and subscription services. While you don’t have to give up all nonessential spending, figure out the maximum amount you want to spend on those expenses. If you’re spending too much, look for opportunities to make cuts.

Small spending changes — even canceling a subscription service or two — can add up over time. Cutting expenses can free up cash to pay down debt, invest in retirement or bolster emergency savings.

A budget isn’t about doing without; it’s a plan to help you afford the things that are most important to you. One way to budget is to try the 50/30/20 rule:

• 50 percent of your budget for needs, including housing, groceries and debt minimum payments.
• 30 percent of your budget for wants, such as vacations, gym memberships and dining out.
• 20 percent for savings and investments.

Of course, final spending ratios will look a little different for everyone. If you need help creating or managing a budget, a budgeting app could help.

Takeaway: Overall, maintaining a budget can help you to remain aware of your spending and ensure you are living within your means. Designing and implementing a budget that works best for you can help with moderating your discretionary expenses and maintaining progress toward your long-term goals.

3. Start saving

Once you have a realistic budget, you can start saving and investing. This effort should include a savings account for larger purchases and emergencies and retirement savings through options like a 401(k).

Maria Alcantara, financial advisor and founder of Millennial Money Queens, says that the smartest way to bolster your savings is by automating the process. If you have a hard time saving extra cash, open a savings account separate from your checking that allows you to automatically deposit a certain amount from each paycheck into that account. A high-yield savings account is a great option since you’ll earn extra cash from the interest accrual on funds in the account.

When saving for retirement, start as soon as possible, says Annette Harris, financial coach and owner at Harris Financial Coaching. Many employers offer a 401(k) plan, which allows employees to contribute a percentage of their salary into a retirement fund. That percentage is often matched by the employer.

“Starting retirement savings immediately establishes [students’] standard of living and budget at the beginning of their careers,” Harris says.

Takeaway: Starting a savings habit early — and contributing consistently — can help you leverage compound interest in the long run through investments like your retirement account. An everyday savings account can also help to keep you from tapping into credit or over-extending yourself for larger purchases.

4. Get insured

As a new graduate, insurance might be the last thing on your mind. Yet securing the coverage you need to protect you should be a priority. Dental, health and life insurance are often provided by employers, but you may also want to seek out additional coverage for life insurance and disability insurance that’s independent of your job.

New graduates should also consider renters insurance and auto insurance to prevent emergencies from becoming financial catastrophes. Renters insurance covers the cost of your belongings if something were to happen to your apartment, and some even extend to personal belongings, like laptops, that you leave home with. Auto insurance, on the other hand, protects you against financial losses in the event of a collision.

Insurance policies require monthly payments. However, those small payments are negligible compared to the tens of thousands of dollars you could face if you encounter an emergency and are uninsured or underinsured.

Takeaway: Though insurance adds another item to your monthly expenses, the right coverage will ultimately save you money in the long run. When you need to file a claim, your monthly payment will likely give you access to more coverage than you would otherwise be able to afford.

5. Manage debt wisely

Many new graduates hold multiple types of debt. From student loans to car loans to credit cards, it’s important to manage your debts wisely to protect your credit and avoid further interest accrual. To get ahead of your debt, you’ll want to pay more than the minimum where you can and investigate alternative payoff strategies.

1. Pay more than the minimum on credit cards: If you pay only the minimum amount, it will take years to pay off your balance, and you’ll waste a lot of money on interest. If you can afford it, pay your credit card balance in full every month.
2. Consider refinancing: If you have private student loans with different interest rates and due dates, refinancing your loans could keep you on track. Refinancing consolidates all of your loans into one loan and might even get you a lower interest rate or a lower monthly payment.
3. Look into different repayment options: The debt avalanche method and the debt snowball method are two popular approaches. The debt avalanche method involves paying off debts with the highest interest rate first and working down from there, making minimum payments on the rest. The debt snowball method has you pay off debt with the lowest balances first and work up, and similarly making minimum payments on the rest.

Takeaway: Staying aware of your debts, the balances owed, and your current interest rates can help you to stay on top of payments and prioritize appropriately.

6. Start an emergency fund

No matter how carefully you plan your budget, surprises can happen. From car repairs to illnesses to job loss, there are many reasons why you might need more money than you allocated in your budget or have available in your checking account.

Many people have to borrow money when unplanned expenses arise. But it’s also possible to plan for financial surprises by creating an emergency fund.

An emergency fund is a savings account with money you set aside for the unexpected. Ideally, you want several months’ worth of expenses in your emergency fund to give yourself some financial cushion if you need it. It can also be helpful to put this money in a separate high-yield savings account so you won’t be tempted to spend it.

Remember, you don’t have to put those funds aside all at once. It’s fine to start small, save what you can afford and build up your emergency savings stash over time.

Takeaway: An emergency fund can offset some of the stress when an unexpected expense arises and help you to save money in the long term by not needing to rely on credit and the interest payments that can come with it.

7. Watch out for lifestyle creep

As you start earning more money, it can be tempting to increase discretionary spending, especially if you’ve been on a tight budget throughout college and during the post-graduation job search. Before you know it, you might find yourself dining out more, spending more on entertainment and making more frequent shopping trips.

There’s nothing wrong with letting yourself enjoy some benefits from an increased salary. But if you’re not careful, spending too much on the nonessentials can snowball.

Instead of spending whenever the desire hits, try planning room for additional purchases in your budget. If your salary allows you to indulge a little more and still achieve your financial goals, you might add a “fun fund” into your budget.

Most of all, when you start earning more money, it’s important to decide what you want that cash to do for you. Think long-term and focus on goals like debt elimination, savings and retirement. But it’s also okay to put aside some money for travel, hobbies and other forms of enjoyment, as long as you don’t hurt your overall financial health.

Takeaway: Staying mindful of your lifestyle versus your income can help to keep you focused on larger goals, whether they’re in the near future or further afield.

8. Invest the right way

When you start earning money after graduation, it can be a good idea to start investing a portion of your income. Investing has the potential to put your money to work for you — helping you build wealth over time and save for the future.

For many people, one of the best ways to start investing is to take advantage of an employer-sponsored retirement plan — typically a 401(k). In some cases, your employer may even match the amount you contribute to your 401(k) up to a certain percentage of your income.

You can also consider investments in addition to your employer-sponsored plan, such as a tax-advantaged investment account like an IRA. If you’re not sure where to start, it may be worth seeking out a financial advisor for guidance.

Takeaway: Investments can be one of the most important things you do with your money. As your investments grow over time, they can be an effective way to build wealth, even if you aren’t contributing large sums.

Bottom line

Graduating from college is a huge accomplishment and a financial milestone in itself. While the realities of the workforce, car payments, student loan debt and general financial management can be intimidating, you can set yourself up for success by taking steps now to assess your finances and establish a budget that works for you.