For many kids who grew up in middle/middle-upper class families, you may have experienced a lifestyle that took your family years and years to create the financial means for.
Owning two cars, a nice home, eating out every week, traveling in the summer, owning a pet – all of these are big expenses that your parents most likely couldn’t afford right off the bat. It took years of working and promotions and raises to get to that point. It took years of saving and investing as well.
For a recent college graduate, it’s a mistake to underestimate those costs and to be in the mindset that you can immediately afford the same luxuries. You can’t. Unless you got some great, six-figure job the day you received your diploma, you cannot afford that lifestyle.
Here’s what you, as a recent college graduate, can do to set yourself up for a similar lifestyle. And for those of you who are parents to a recent college graduate, pass on these strong financial habits to set them on a path that will help them address their financial future.
Keep Your Expenses Low
You graduated. You got a job. For the first time in your life you have a salary. Don’t go blow it on restaurants or a fancy apartment.
Spend your first six months getting used to your expenses. Just because you make $60,000 annually, doesn’t mean you’re taking home $5,000 every month. You have taxes and social security and Medicare payments.
Understand where your money is going before you start incurring more expenses.
Rather than going out to restaurants, plan on going to the grocery store. Rather than renting a loft downtown, rent a six-bedroom apartment outside of the city with five other people. Don’t go get a new wardrobe right away – maybe buy one suit for interviews.
By keeping your expenses low you can set a solid financial foundation for yourself. You can grasp a strong understanding of where your money is going and how much money to can afford to spend. From that point, you may begin to slowly increase your lifestyle and allow yourself some smaller luxuries.
And I say smaller luxuries intentionally. If you have an extra $500 per month after all of your expenses have been accounted for, this doesn’t mean you should run out and spend it all. This doesn’t mean you can incur a $500 car payment because you have the money.
This is money that you can save for a new home or invest for your future.
Financial First Steps
Once you understand your expenses, a solid starting point is Dave Ramsey’s baby-steps program. As I mentioned just previously, start saving early.
The first baby step is setting up a $1,000 emergency fund. It’s imperative that you have an emergency fund in place because emergencies do happen. You get a flat tire, your car breaks down, you incur a medical expense (I hope not, but it happens) – whatever it is, you have to be prepared. Dave Ramsey says it best: “an emergency fund turns a crisis into an inconvenience. Once I got an emergency fund, I quit having emergencies.”
Once you get started on your emergency fund, talk to your HR department. If you have a job, speak with them and understand your benefits. Gain an understanding of your insurance.
Start Contributions Early
When you speak with your HR department, make sure you are taking advantage of your work’s retirement program. If they offer a 401k, begin making contributions as early as you can. If they offer a match, then find a way to at least invest enough to get the full match – that’s free money.
By starting early, you’re doing the best thing for your investments: giving them time to grow. Something we like to say around here is, “it’s time in the market, not timing the market.”
Make those contributions early and allow them to grow. Take advantage of compound interest and exponential growth. In most cases, someone who begins investing at 25 will be better off than someone who waits until they’re 35.
To all of the recent graduates – congratulations! Graduating college and entering the real world is a big deal. Just make sure you are putting yourself in a position that allows you to address your financial future. Stay away from debt. Stay away from the credit cards.
Understand where your money is going each month before you begin to make huge lifestyle improvements. Understand your expenses and live within your means. Just because your parents eat out twice-a-week doesn’t mean you can.
Start saving and investing early. Set up an emergency fund and continue to pursue each of Dave Ramsey’s baby steps.
And finally, take advantage of your company’s retirement plan. If they offer a match, take full advantage. The longer you allow your money time in the market, the better you will position yourself for the future.
For more on beginners financial advice check out the Mind of a Millionaire podcast.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
No strategy assures success or protects against loss.