College teaches just about everything. Some of us can quote Aristotle, others can strategically map our solar-powered cities. Some of us can theorize truth and others can do mathematical equations beyond our wildest dreams. These are all good and well, but let me ask you something: What’s your credit score? Do you know the difference between a salary and net income? Have you put aside money into an IRA or 401(k)? (Do you know what those are?) Are stock investments part of your savings plan? Do you have a savings plan?
Last question: Are you thinking, “Huh?” with a quizzical brow and frowned mouth?
Don’t worry, there’s no reason to fret. In fact, a lot of these questions are easier to answer than you think. Plus, they are all things that soon-to-be graduates can begin to work on right now.
By implementing minor changes throughout your upcoming post-grad years, you can improve your financial literacy, as well as become a better saver, a smarter investor, and feel a bit less overwhelmed when that loan bill comes in the mail.
Here are some things to know about your finances as you approach that aisle of pomp and circumstance.
Debt and Credit
You went to school and now you have this awesome degree. Congratulations! Now, you have to pay for it. It’s easy for graduates to become overwhelmed by the thought of paying back student loans.
According to the 2016 Consumer Financial Literacy Survey, “Among those who are currently repaying loans, nearly 2 in 3 (66 percent) say student loans (either their own or their children’s) impact their overall personal financial situation negatively. Over 4 in 10 (40 percent) adults overall do not feel confident they would be able to repay a $30,000 loan for a college education.”
You graduate with debt and can’t begin to save for the future because you’re too busy paying for the past, making it even more difficult to build credit for that new apartment, car, or trip you want. The good news is, paying off your debt works hand-in-hand with building your credit.
Heidi Moore, a finance and economics editor and former writer for The Wall Street Journal, recommends paying your student loans as aggressively as possible. “Your credit does take, obviously, a hit when you’re in debt, but if you pay it off on time that’s what starts to constitute good credit.”
By paying more than the minimum, your loans won’t pick up interest over time.
“Very few people know this, but if you pay the minimum every month, it will take you probably a decade to get out of those student loans,” Moore says. “If they’re really high, you can renegotiate them and so look into ways to reduce those monthly payments.”
If you don’t have loans or are on a healthy payment track, begin to put money aside and save for your future goals. Making payments on time — this includes loans, bills, and credit card payments — will help boost credit. Moore encourages graduates to have at least one credit card, but keep its usage for emergencies only.
“They’re just your back up. You want to charge just enough to get points or whatever it is you have that card for, but if you have too many cards and you have to start closing them, your credit is going to take a huge hit.”
Salaries and Benefits
So, you got the job and your salary is killer … or is it? There is a difference between how much you make for the job you do and how much you take home in your weekly or bi-weekly paycheck. This is called your net income. If you get a job or an internship, it’s important to factor in a series of deductions that will hit your paychecks. Your salary may be $45,000 a year, but after taxes and voluntary deductions such as transit checks, health insurance, and retirement savings, you could easily be coming home with $5,000 less than your annual salary.
The Opportunity Network, a college and career prep program, advises their students to be conscientious of negotiating a salary offer when thinking about accepting a job. It’s important to know the monetary value of the job you are doing. Ask yourself, “How much do people in my field normally make?” Contrast this offer with the benefits the job is offering — maybe you are making $3,000 less than usual, but the job comes with a health insurance plan; perhaps you are making $5,000 more than usual, but the job doesn’t allow for any paid time off and few vacation days. Consider the deal holistically and do enough research to counter any potential offers.
Saving is a Graduate’s Investing
Investing money can come in many forms. You can purchase shares of a stock or put money into a potentially profitable business. These are all great ways to have a stronger return on your finances over time, but it’s not necessary to focus on it fresh out of your cap and gown.
Moore says the main goal is to learn how to manage your money.
“Your challenge for the first two years of your career is not going to be investing, it’s going to be how to save money and how to be able to afford the things that you want and build for the future.”
Moore recognizes the temptation for young people to see their salary as large allowance, which is why it’s important to begin to think of saving as an essential part of managing money to invest in what you want down the road.
Saving will allow you to invest in experiences like traveling or in other money-making opportunities.
“If you don’t have some money in your bank account, then you can’t do that. You always have to weigh whether the short term joys of spending money are going to be worth the long-term loss of access to that freedom,” Moore says.
Basic Budgeting and Saving
All of these things may seem overwhelming, but there are some basic budgeting and saving mechanisms that can help you build these skills to better manage your money in preparation for the future.
Moore says to look for places to cut your expenses as low as possible. A basic budget consists of “rent or mortgage, entertainment, travel, and then utilities and transportation.” Look through each category and try to find the cheapest method as possible. For transportation, is it cheaper to take public transportation? Maybe riding a bike is more cost effective?
“For entertainment, try to keep eating out to a minimum,” says Moore. “You end up spending a lot of money on takeout and restaurants that you’re not going to get back.” Do you use your gym membership? Do you need cable when you watch Netflix?
Another way to save some cash is to figure out what your spending weakness is and choose days where you don’t spend anything. “The whole purpose of that is to see if you can get your bank account to a place where you have enough cushion that if something happens to your career or if you lose your job, you should have at least three months of living expenses. The first financial goal would be to accumulate that,” Moore says.
Moore recommends apps like Digit that scrape your checking account for loose change and dollars not being used and puts it away into a savings account.
Another is Clarity, an app that looks at your checking account and maps your spending habits and looks for areas in your budget where expenses can be lowered.
Retirement
Saving for retirement is not as much about the money as it is about time. The earlier you begin saving, the more time you will have to invest. The more money you invest over time, the more return you will get back each year. Boom.
According to JP Morgan’s 2016 Guide to Retirement, “Saving early and often, and investing what you save, are keys to a successful retirement, due to the power of compounding over the long term.”
Saving may leave you with a sizeable amount of money, but investing can take you even further.
Some employers will offer retirement plans that will match the amount of money you put away into your 401(k) (or 403(B) if you work in the nonprofit sector) by a certain percentage.
“If you’re not taking that, you’re leaving money on the table. You should consider that part of your salary,” Moore says.
An easier — and fun! — way to think about retirement is to imagine what you would like to do with your life and time after over 40 years of work — imagine that life, then begin to think and research the price of that lifestyle.
It’s easier to plan for the future when you have an idea of what to look forward to.
Graphic by: Alex Gilbeaux
