Graduation is an exciting time and you’ll probably experience more changes during the 6 months following graduation than at any other single time in your life. For many people it’ll be the first time you’ve had a full-time job making good money (you hope), the first time you’ve lived on your own, the first time you’ve lived in a different state (or country) and the first time you’ve been in complete control over what you’re going to do with your life. It’s a stressful time but also exhilarating.
Unfortunately, with the first blush of freedom, both personal and financial, many grads jump into situations without fully thinking them out. Below are 5 of the worst mistakes new grads make and hints on how you can avoid them.
1. Ooh, pretty, sparkly
It’s understandable, you’re finally receiving real pay checks, you have a shiny new job and it just makes sense to have a shiny new car to match. Unfortunately, financially speaking buying a new car is one of the worst decisions you can make. Most new cars depreciate 25% or more within the first year which means that you’ll be stuck paying full price for something that went on sale 10 minutes after you purchased it.
Instead of buying a new car it’s a much better idea save your money for a few months and pay cash for a used car. A 3-5 year old car can look just as nice as a new one and can cost half the price. If you really think that buying a new car is the way to go, do yourself a favor and try it out first. For 12 months, put the amount of your car payment into a savings account each month. Don’t forget to include the extra money that you’ll pay for the higher insurance coverage which you’ll need with a financed car.
If, after a year, you are able to easily save for retirement, pay your bills in full and on time and still make your ‘car payment’ then go for it. Use the money you’ve saved over the last year as a down payment on the car that you want. However, what you’ll probably discover is that the RM600/month car payment that seemed so easy to make isn’t quite so easy now that you’re paying on student loans, credit cards, utilities, entertainment and all of the other expenses you may never have had. It’s usually about 6 months into the new car loan (when those student loans start coming due) that most new grads begin seriously regretting their purchase.
2. The super sized apartment with a side of furniture Finally, freedom! No more dorms. No more sharing a bathroom with 20 other people. No more having someone tell you what you can hang on your walls, when you can listen to music and when you can come and go. Why not celebrate by getting a nice big apartment all of your own!
It sounds great, but there are a few drawbacks. First, that great check you’re getting from your employer won’t be quite so great once they’ve taken out taxes and retirement contributions. Add to that student loan payments, credit card payments, the big utilities that go with big apartments and you end up with enough for a couple packets of ramen noodles and some tuna. Tack on all of the furniture you’ll have to buy to fill a 900sf space instead of a 300sf one and you can forget about the tuna.
Instead of opting for the penthouse, consider sharing an apartment with a friend (or three) for the first year or two out of school. This will do a couple of things. 1 – it will help you transition from student to employee while still having a pre-made social life. It’s harder to make friends once you’re out of school so you want to hang on to the ones you have. 2 – it will keep down the cost of living expenses until you get used to having money and learning how to budget it.
If you’re really just ultra sick of living with someone, consider getting a small studio all on your own instead of the 3 bedroom ultra-pad. This will keep rent and utility costs down and limit the amount of spending you can do on furniture and decorations.
3. The employee’s new clothes
You have a great new job and suddenly the jeans and flip flops you lived in during school just don’t work. Time to hit the shops! FUN!! Right? Wrong! There are a few things wrong with this theory. 1 – most people can’t afford a whole new wardrobe without putting a serious hurt on their credit cards. 2 – you may have a skewed idea of what people are actually wearing to work each day so you may buy the wrong stuff. 3 – odds are good that you’ll experience a bit of a weight shift after graduation so you don’t want a whole new wardrobe in the wrong size.
Instead of running out and shopping until you drop, buy just a couple of basics that you can mix and match. A basic suit that you can wear to meetings with clients and then some shirts/pants/skirts/ties that you can mix and match to make any number of outfits is all that you need to get started. Classic pieces will get you far while trendy clothes will make you stick out in 6 months when fashions have changed but your budget to replace them hasn’t. Stick to clothes in the same color palette so that it’s easy to combine them. Shop discount stores like Filenes Basement, TJ Maxx, Marshalls, etc and look for great deals. A wardrobe should be built over time.
To keep your clothes looking good, make sure you treat them well. Dry clean your suits only a couple times a year or you risk ruining them. Hand-wash sweaters to save money, learn to iron and use the correct settings on your washing machine so you don’t ruin delicate fabrics.
4. Retirement? I’m only 23! I’ve got plenty of time!
Of all the financial mistakes that a person can make, not starting their retirement savings early is the one with the worst long-term consequences because you’ll never be able to replace the money you didn’t contribute.
These days most employers offer a retirement plan of some sort and many offer some sort of company match. This means they’re going to give you FREE money. Who doesn’t like free money? Since money is probably going to be tight, odds are good you won’t be able to max out your retirement plan ($15,500 in 2007) but you should at least try to contribute something, ideally enough to get the full company match. Eventually you want to be contributing at least 10% of your pre-tax income to retirement accounts. Since you’ll also have tons of new expenses and loan payments it can be hard to figure out where your money should really be going. This is the general plan you should follow:
- Pay your required bills. This includes rent, utilities, food (not eating out every day), minimum payments on credit cards, student loans, etc. This does NOT include going out partying, buying furniture, going on vacation, etc.
- Contribute to your company retirement plan enough to get the full company match. If your company doesn’t have a match, then continue to step 3.
- Pay off all consumer debt. This includes credit cards, car loans and any high-rate student loans.
- Either start maxing out your employer plan or start saving for another goal, like buying a house.
Following this plan will insure that you are taking full advantage of the retirement options out and help you make good decisions about your money.
5. Credit, credit, who’s got good credit?
Assuming you’re not already knee deep in credit card debt after 4 years of easy credit and late-night pizzas, it’s time for you to get, and correctly use, a credit card. You’ll find that at many companies you’re expected to pay for your own expenses and then get reimbursed. This is when it’s helpful to have a credit card. However, if you’re going to use a credit card, be smart about it!
First, get a rewards card of some sort, but don’t pay for it. There are enough companies out there that offer cards for free that there’s no reason to pay for one. When most people think rewards cards they think airline but those really don’t work well unless you fly A LOT!
Second, make sure to pay your bill in full every month. The best way to build a good credit score is to prove that you can manage your credit and pay on time every month. The easiest way to do this is to set up a recurring bill (cell, cable, etc.) that you would be paying normally to be paid directly by your credit card each month. Then set up an automatic payment to the credit card to cover that bill and any other charges you may make. The most important thing to remember with credit cards is that they’re not bad if you use them correctly. Don’t charge more than you can pay in full each month and always pay on time.
Finally, make sure you monitory your credit report. Every person is allowed to get one copy of their credit report free each year from each of the three big credit agencies. What you should do is, every 4 months get your free report from one of the agencies. This will allow you to monitor your credit on an ongoing basis to make sure there’s nothing weird going on. You can get your credit report for free by visiting www.annualcreditreport.com. If you want a copy of your credit score you’re going to have to pay. The best place to get your score is www.myfico.com. That’s the official score that most companies use.
As you’re building your credit, keep in mind that mistakes hurt, a lot, and stay with you for a long time. Negative items stay on your report for 7.5 years from when they happened and with more and more people checking credit these days, good credit has never been more important. The following types of people will check your report to evaluate whether they should work with you or not: employers, insurance companies, banks, apartment complexes, utility companies and more. Having good credit is very important so take care of yours.
by personalfinance101.org
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