You’ve thrown your mortar board and ditched that gown. Now the real work begins: It’s time to develop the good financial habits that you’ll need to follow all the way through retirement.
Yes, you’ve just graduated from college and full-fledged adulthood seems a long, long way off. But you’ll be surprised once you enter the working world how fast time can move.
Here are five money moves you should make the moment you graduate from college. They’ll help you save for a home, build an emergency fund and, yes, amass a nice nest egg for your retirement years.
Develop a Strategy for Paying Off Your Student Loan Debt
You’ll graduate with a degree. But the odds are high that you’ll graduate with plenty of student loan debt, too. The federal government says that nearly 70% of college graduates with bachelor’s degrees leave college with student loan debt. Edvisors adds that the graduating class of 2015 graduated with an average of $35,051 in debt, the largest amount ever.
Most graduates will have to begin paying off their student loans six months after they leave college. Don’t miss your first payment. That will hurt your credit score, and that number determines if you’ll qualify for car and home loans and at what interest rate. Make sure, though, that you repay your loans in the best way for you. You can choose a standard repayment plan of 10 years with a fixed monthly payment. If you are struggling to make a solid income after you graduate, you can also choose an income-based repayment plan. Under these plans, your monthly payment is based on your income, rising (or falling) as your pay changes.
The best choice, of course, is to pay off your loans as quickly as possible, which means taking the 10-year term. You’ll pay far less in interest with this approach. But you’ll have to take a close look at your finances first. If you can’t afford the bigger monthly payment, it’s better to stretch your loan out over more years than it is to miss a payment because you didn’t have enough money to cover the bill. (See also: 8 Surprising Ways to Pay Off Your Student Loans)
Create a Budget
Drafting a budget isn’t much fun. But it’s important; without one, you run the risk of spending more money than you bring in each month. That could lead to credit card debts as you turn to the plastic to cover your living expenses.
Fortunately, drafting a budget isn’t that challenging. First, calculate how much money you bring home each month. Then, calculate your fixed expenses: your student loan payment, rent, car payment, and anything else you pay the same for each month. Finally, determine your variable expenses. These are expenses that you have each month but that fluctuate. This could include your utility bill, grocery bill, and the money you spend on entertainment.
The difference between your expenses and income is the extra money you have each month. You now know how much you can save each month. (See also: Build Your First Budget in 5 Easy Steps)
Start Building an Emergency Fund
You’ll learn quickly after graduation that financial emergencies pop up all too often. You might suddenly need to pay for a new transmission for your car. Or maybe your laptop dies and you need a quick replacement. The worst thing is to pay for these emergencies with your credit card. The best approach: To steadily build an emergency fund that you can dip into when emergencies arise.
You can start small: Even $50 or $100 a month will add up over time. Deposit this money in a savings account and only withdraw from it for emergencies. An emergency fund is a great way to build financial peace of mind. (See also: A Step by Step Guide to Creating Your Emergency Fund)
Eliminate That Credit Card Debt
Some debt is worse than others, but no debt is worse than credit card debt. That’s because credit card debt comes with interest rates that can be as high as 24%. If you don’t pay your credit card bill in full each month, that debt has a bad habit of growing out of control.
The smart move, then, is to always pay more than your required minimum monthly payment. It’s best to pay off your credit card debt in full every month so that you aren’t carrying a balance. But if that’s not possible, always pay a bit extra each month until you whittle away that high-interest-rate debt. (See also: Best Credit Cards for College Students)
Open a Retirement Account
Again, retirement is a long way away. But the sooner you start saving, the easier it is to build the financial cushion you’ll need after you leave the working world.
If your employer offers a 401K plan, be sure to enroll in it! And be sure, too, to contribute the maximum amount from every paycheck. This is a great, and surprisingly painless, way to build retirement dollars. If you don’t have access to a 401K plan, open an IRA or a Roth IRA, and make regular contributions. As with building an emergency fund, you don’t have to make huge investments in your retirement accounts right now. Simply contributing small amounts now — whatever you can afford within your budget — will pay off big in the future.
What smart money moves do you think recent grads should make?