The following is a guest post by Daniel Matthews.
College graduation is exhilarating. When I walked, and when I threw my hat in the air, it seemed like everything good was happening at once. No more homework, no more stress over exams.
But when freedom hit, it hit hard. Freedom meant I was chained to bills, the looming student loan payments, the constant search for a job to justify my forty-thousand dollar English degree. Rent, utilities, insurance, car payments, loan payments–all of it came crashing down hard. Plus, how was I going to start saving for any important things, such as marriage, buying a house, having kids, retirement?
The recent grad who can navigate through finances after college might as well be a guru. I made it through, but not without a struggle. I made mistakes. The entirety of what I learned from the mistakes could be a novel. Since there’s not enough room for that here, and your time is money, here’s a more economical take on my findings.
Determine Your Priorities
When I graduated, I was faced with a choice. Did I want to live in my own place, pay rent, and work to get by while I kept looking for the job I really wanted? Or did I want to move back in with my parents, save money, and pay off debts ASAP?
About 72% of the jobs created after the Great Recession went to college graduates. 2.8 million of those jobs pay more than $53,000 a year. You stand a good chance of finding a good job coming out of college, and it’s tempting to want to have as much independence as you can, right away.
But is paying big interest on student loans, paying high rent prices, and not saving money the right way to go? If you want to make the absolute most of your post-grad income, go with the least expensive living situation. That way, you can pay off loans as soon as possible. You can start setting money aside, and maybe some of your savings can go toward that awesome trip to Europe, or that trip around the world you’ve been planning.
Pay Off Those Loans
After you graduate, there’s typically a six month grace period from your lender. I made the mistake of thinking about everything but my loan debt during that time. I simply thought, ‘When the time comes, I’ll start paying.’ I then proceeded to make minimum payments, accruing interest along the way.
Instead, after college, earmark as much of your initial take-home as possible for paying off loans. You’ll pay less on interest overall and will avoid the long-term headache of continuing payments. Schedule auto-debit, which typically comes with an interest rate reduction. If you can, choose a payment plan with the highest monthly payment. The quicker you get debt out of the way the less interest you’ll pay.
- If you have more than one loan, the federal government can combine them all into one, giving you less paperwork to juggle
- This will change variable interest rates to a single fixed rate
- This can lower monthly payments
- Lower monthly payments mean you pay more on interest, long-term
- You’ll lose any borrower benefits you had before, such as interest rate discounts and principal rebates (principal is the total amount you borrowed)
Consolidation is a way to get everything squared so you’re not multi-tasking payments. Refinancing is a little different:
- If you have good credit, a private lender can buy all your loans, consolidate them, and give you a consolidated loan with a lower interest rate
- You may end up with a lower interest rate and terms that suit you better than your previous loans
- You’ll lose the possibility of student loan forgiveness that comes with federal loans, and you won’t be able to participate in REPAYE (income-based payment terms)
- The variable interest rate can rise over time
- Like consolidation, you’ll lose any of your original borrower benefits
If you’ve been financially sound throughout college and have good credit, refinancing is an option for paying off your loans fast, at a lower interest rate.
When I was in college, I opened a student credit card. Seems like a terrible idea. The interest rates on those cards are incredibly high. As an irresponsible student, I was walking into the hot lava that is bad credit.
If you just make minimum payments, the high interest rate on a student card means you’re spending far more than the actual cost of what you buy.
But opening a card and being responsible with it is one of the primary ways for you to build credit. In the future, good credit will open the door for a new house, a new car, a good job. Open a card but don’t owe more than 30% of the limit. Pay it off, and leave the card open. This shows lenders you have a good credit history. Here are some other tips on building good credit:
- Monitor your credit report–this will keep you aware of what you need to work on
- Settle debts–payment history accounts for 35% of your credit score
- Don’t apply for new cards–if you still owe on a card, applying for new ones will cause a credit check, and will hurt your score
- Pay bills–if you don’t pay your bills and they go to collections, this hurts your credit; and, if you don’t have any previous credit, FICO can now use your utility bill payment history to determine your score
- Get a secured credit card–with a secured card, you put down cash and receive a card worth that amount; this helps you build credit
If you can qualify for a cashback rewards card, do it. Just like it sounds, the rewards card pays you money for making purchases. Stay below 30% of your spending limit, pay it off each month, and you’re building credit while you make money.
Explore Savings Options
I have always been very loyal to my bank. Looking back, I don’t think this is the best strategy. The interest you earn from a single savings account is paltry compared to what you could be earning by diversifying.
There’s nothing wrong with being loyal to a single bank, it reflects well on you financially and your bank will be eager to give you loans and different lines of credit with positive terms. But the fact is, other banks are constantly offering incentives to open new accounts. Oftentimes, they’re cash incentives.
Furthermore, both a CD and an IRA are ways to save and earn money at the same time. With a CD (Certificate of Deposit):
- You earn a higher interest rate than with a savings account
- You promise to keep your money in the account for a certain amount of time
- If you take your money out, you’re penalized
Optimally, get a CD when the interest rate on it is higher than the Federal Reserve’s short-term interest rate. You’ll make more on the CD than you will with savings.
An IRA (Individual Retirement Account) is specifically designed to set you up for retirement:
- Through the IRA account you invest in stocks, mutual funds, bonds, and real estate
- You determine what types of investments will be in the account
- You decide how much money to put into the account
- All the money you make from investments goes untaxed as long as it’s in the account
With a traditional IRA, your contributions are tax-deductible, but you’ll pay income tax on what you withdraw. With a Roth IRA, your contributions aren’t tax-deductible, but you won’t pay income tax after you take your money out. In both cases, you’ll withdraw your money after age 59 ½. Calculate how much you can afford to save and automate transfers from your checking account to your IRA. You’ll be saving and earning money instead of spending it.
Get a 401(k) and an HSA
I eventually got savvy to both of these, and I don’t regret it. Look for jobs that offer these benefits.
A 401(k) is retirement savings method whereby you set aside a certain amount of your paycheck. Your employer matches your contribution, up to a percentage of your income. This money comes out of your paycheck pre-tax, meaning you don’t pay taxes on it like you do the rest of your income. You also get free money from your employer. The money goes toward investments in stocks, bonds, and money markets.
The HSA (Health Savings Account) also involves a certain amount you deduct from your paycheck, pre-tax. Your employer matches that amount, up to a certain percentage. You then have money to pay for preventive medical checkups. According to Villanova University, this covers medical expenses not covered by your health insurance. As of 2016, the contribution limit for families has gone up from $6,650 to $6,750.
Both the 401(k) and the HSA are great ways to set aside your money for important things and save money on taxes.
Daniel Matthews is a freelance writer and musician from the Northwest. He specializes in technology, finance, and lifestyle. You can find him on Twitter.