1. No Emergency FundIn this next phase of your life, it’s essential to save money, specifically for emergencies. When you least expect it, your car may need a repair, you need expensive dental work, or you perhaps get laid off from your job. These unexpected events happen to all of us, so it’s important to plan for them. Commit to building up an emergency fund that can cover six months of your basic living expenses. You can open interest-bearing savings account like an FDIC insured money market deposit account (MMDA) just for this purpose. This way, the money is readily accessible and earns a little interest. By having this safety net available, you won’t have to reach for your credit card and ramp up debt for emergencies. Instead, you’ll have peace of mind that you’ll be ready for these unplanned expenses.
2. No Monthly BudgetChances are you were living on a meager financial diet at college, where students find frugal ways to get by. Now that you’re living a more independent life, you need to have a budget and keep your spending in control. Don’t get rid of all your ramen noodles until you have a fully-funded emergency fund set up! Don’t rush to sign that apartment lease with a breathtaking view without creating a budget first. Figure out your necessary expenses like rent, utilities, food, and commuting expenses. These needs come first before you dive head-on into your wants like a brand new car. You may be making more money than ever, but your income has to cover your higher cost of living. The temptation to indulge in wants may run high. It’s your money, but you need to be wise to start on a path to wealth. Review your spending regularly to see how you’re doing and find potential cost reductions. There are free apps like Personal Capital, Mint, PocketGuard to help you track your daily spending and help you reach your goals.
3. Living Beyond Your MeansWhen you strike out on your own, you may find your newfound freedom is costly. Put the brakes on large or repeated impulsive spending. Living beyond your income is a recipe for financial disaster. Your goal is to spend less than you earn so you can save money and invest some of your earnings. While it is easy to justify higher spending, you want to have some money left in your accounts after your year of hard work. Overspending can happen when you feel you deserve a high life and seek instant gratification. Or when your friends are hitting up bars and expensive restaurants every weekend. Resist the urge to buy designer clothing for work, an expensive new car, or go on lavish vacations. Don’t fund a costly lifestyle on credit cards when you can’t afford it.
4. Getting Rid of Your RoommateAfter graduating college, the last thing you may be thinking about is living with a roommate again. However, your housing costs are going to be a significant portion of your budget. Are you ready to hand over most of your hard-earned paycheck to your landlord? A roommate may not have been in your plans, but by absorbing all of the costs of rent, utilities, and renter’s insurance, you may be deferring other financial goals that you may have, like paying off your student loans or saving to purchase a place. Sharing expenses with a roommate, you may not see very much may provide you with worthwhile savings. Those savings can give you the financial flexibility you may not otherwise have.
5. No Student Loan Repayment PlanOne of your most considerable new responsibilities will be to make regular student loan payments. Don’t put off paying these loans or extending the time further into the future. Go for the standard repayment plan with equal monthly payments up to ten years. There is usually a grace period, allowing you six months to financially settle down before payments are due. If you live at home or have a roommate, why not start making payments right away? It’s a good idea to schedule automatic debit payments from your bank account and linking your paycheck deposits. By doing so, you may be able to shave a 0.25% interest rate reduction on certain federal loans over their life. That’s saving money! Having several loans can be complicated. Organize your payments from multiple sources into a spreadsheet. If you have varying due dates, contact the loan servicers to see if you can synchronize payments, or spread them out across the month, to make it easier. Alternatively, you can automate all your payments so you don’t miss a bill. Make this a priority, as, over time, you’ll end up paying back more than you took out to begin with. Plus, the stress reduction from being debt-free is priceless.
6. Ignoring Your Company FreebiesWhat’s in your company goodie bag? Many answers to your financial future are in your benefits package, yet some don’t look close enough. There are different types of benefits that add meaningfully to your compensation. As a new employee, you may overlook some essential features trying to make sense of it all. Beyond the paid vacation, holidays, and sick time, look for perks like flexible work options, paid gym memberships, professional development grants, paid smoking cession offers, or student loan repayment programs that will directly benefit you. Some of the valuable offerings in your package may need your immediate attention, like an employer-sponsored 401K plan that you may need to opt into for participation. Look for insurance plans, such as health insurance, to know the details of the plan.
7. Turning Down Free Retirement MoneyWhy would a 22-year-old be thinking about retirement? After finding out where the restroom is in your new workplace, your employer-sponsored 401K retirement plan is next. Seriously, it’s that important. The best time to start contributing to retirement is now, especially if your company is giving you free money for your retirement account. Many employers increase your account by matching part or all of your contributions. When you make contributions early, even if it is small amounts initially, you can fuel your money through compound growth. Compounding is when you earn interest on interest, which magnifies your growth over 40 or more years. Automating contributions from every paycheck takes care of it in one step. Waiting will cost you tons of money in the long run. If your younger brother starts investing $100 a year at age 25, but you wait to invest the same amount until age 35, you’ll have less than half in your bank account at age 65. So even though your sibling only contributed $12,000 more over a ten-year time frame, he’ll have $162,000, and you’ll only have $89,000.
8. Skipping Health InsuranceYou’re young and healthy and rarely think about big doctor’s bills. Should you break your leg skiing or hurt yourself playing basketball and require surgery, you may be looking at a very high bill if you don’t have health insurance. If you’re under 26 years of age, you can continue to stay on your parents’ health insurance plan. Depending on your employer and employment type, you could potentially get your own plan. Ensure you check the monthly premiums and deductibles to truly understand the cost and your new healthcare coverage details.
9. Racking up Credit Card DebtCredit cards can be beneficial but can tempt college students and recent graduates beyond your means. It’s fun to collect credit card rewards, airline miles, or cash back. However, they can also be financially toxic if you don’t handle them with care. If you find yourself in a situation where you can’t pay the balance off in full, you should always pay the minimum on time to not dent your credit score with late or missing payments. If you only pay the minimum amount required, you will be building a mountain of high-cost debt you can’t easily shed. Say you charge a $1,500 vacation on your credit card that has a 19% interest rate. If you repay the credit card company only the minimum amount each month, you’ll start with a $60 payment. But to pay the whole amount, plus interest, you’ll have to make a total of 106 payments and pay them $889 in total interest. That’s more than half the amount of your vacation extra!
10. Ignoring Your Credit ScoreBuilding a good credit score may not even be on your radar. But if you want to rent your own apartment, purchase a car, or buy a home in the next couple of years, having a good credit score is crucial. Be patient about getting your credit to where you would like to be. It can take years and effort to build credit on your own and earn a good score. Good financial habits matter and can help the process along. Monitor your credit report and track your score periodically. First, you need to build your credit file. Start opening a couple of accounts that report to the primary credit bureaus. Separately, you can become an authorized user on a parent’s credit card so long as they have a solid credit score. Establish your track record as a borrower over time by handling your payments properly. Your credit will benefit from paying your bills on time. Don’t carry a credit card balance which can increase costly debt, become a challenge to manage, and may get you turned down for an apartment lease.
11. Delaying InvestingA regret I share with many people is not investing earlier. The best time to start investing is now, even in small increments. When you are young, you have time on your side, so don’t waste it. Having a long-term perspective when investing allows you to ride out the volatility rather than bailing out of the market. Compounding power can fuel our investment returns to higher heights. Once you have set aside some money for emergencies and automated contributions for your retirement account, use some savings to open a brokerage account and buy a low-cost index fund that tracks the market. These funds provide you with essential diversification from the start. With confidence and learning the ropes, you can expand your portfolio as you turn savings into investments. Understand your risks but avoid being reckless. This article originally appeared on Your Money Geek and has been published with permission.
Common Money Mistakes: Final ThoughtsThe information in these posts may seem like a lot. Add to that what you find on the Internet is likely overwhelming too. So let’s take a step back and just look at the big picture. The whole idea is to be careful with your paycheck. Understand that a lot of what you sign up for with your employer is, or can be, deducted pre-tax. This translates to a lower post-tax paycheck, however, often the difference isn’t that high. In addition, while you may feel like you’re “missing out” by paying for all the things we are telling you to, understand that you’re paying yourself. You’re paying for your future in retirement and investing, you’re paying for possible emergencies so that you can avoid further debt, and you’re paying down debts to lower your overall total payback. The name of the game is saving money. While it may seem like a lot, your future self will thank you for it.
The cents of money is about financial education, here to teach and inspire you about money, seek new ideas, and to create greater comfort in your world about one of life’s great stresses. Linda wants to use her financial skills honed by her professional experience to help others.