The 5 Mistakes New College Graduates Make

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:

1. 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.
2. 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.
3. Pay off all consumer debt. This includes credit cards, car loans and any high-rate student loans.
4. 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

10 Reasons You Aren't Rich

The reason why you aren't a millionaire (or on your way to becoming one) is really quite simple. You probably assume it's because you aren't earning enough money, but the truth is that for most people, whether or not you become a millionaire has very little to do with the amount of money you make. It's the way that you treat money in your daily life.

Here are 10 possible reasons you aren't a millionaire:

1. You Care What Your Neighbors Think: If you're competing against them and their material possessions, you're wasting your hard-earned money on toys to impress them instead of building your wealth.

2. You Aren't Patient: Until the era of credit cards, it was difficult to spend more than you had. That is not the case today. If you have credit card debt because you couldn't wait until you had enough money to purchase something in cash, you are making others wealthy while keeping yourself in debt.

3. You Have Bad Habits: Whether it's smoking, drinking, gambling or some other bad habit, the habit is using up a lot of money that could go toward building wealth. Most people don't realize that the cost of their bad habits extends far beyond the immediate cost. Take smoking, for example: It costs a lot more than the pack of cigarettes purchased. It also negatively affects your wealth in the form of higher insurance rates and decreased value of your home.

4. You Have No Goals: It's difficult to build wealth if you haven't taken the time to know what you want. If you haven't set wealth goals, you aren't likely to attain them. You need to do more than state, "I want to be a millionaire." You need to take the time to set saving and investing goals on a yearly basis and come up with a plan for how to achieve those goals.

5. You Haven't Prepared: Bad things happen to the best of people from time to time, and if you haven't prepared for such a thing to happen to you through insurance, any wealth that you might have built can be gone in an instant.

6. You Try to Make a Quick Buck: For the vast majority of us, wealth doesn't come instantly. You may believe that people winning the lottery are a dime a dozen, but the truth is you're far more likely to get struck by lightning than win the lottery. This desire to get rich quickly likely extends into the way you invest, with similar results.

7. You Rely on Others to Take Care of Your Money: You believe that others have more knowledge about money matters, and you rely exclusively on their judgment when deciding where you should invest your money. Unfortunately, most people want to make money themselves, and this is their primary objective when they tell you how to invest your money. Listen to other people's advice to get new ideas, but in the end you should know enough to make your own investing decisions.

8. You Invest in Things You Don't Understand: Your hear that Bob has made a lot of money doing it, and you want to get in on the gravy train. If Bob really did make money, he did so because he understood how the investment worked. Throwing in your money because someone else has made money without fully understanding how the investment works will keep you from being wealthy.

9. You're Financially Afraid: You are so scared of risk that you keep all your money in a savings account that is actually losing money when inflation is put into the equation, yet you refuse to move it to a place where higher rates of return are possible because you're afraid that you will lose money.

10. You Ignore Your Finances: You take the attitude that if you make enough, the finances will take care of themselves. If you currently have debt, it will somehow resolve itself in the future. Unfortunately, it takes planning to become wealthy. It doesn't magically happen to the vast majority of people.

In reality, it is probably not just one of the above bad habits that has kept you from becoming a millionaire, but a combination of a few of them. Take a hard look at the list, and do some reflecting. If you want to be a millionaire, it's well within your power, but you'll have to face the issues that are currently keeping you from creating that wealth before you will have a chance to call yourself one.

10 Reasons You Aren't Rich
by Jeffrey Strain

How to Effectively Set and Track Goals

Why set goals?

Setting goals is one of the most important things you can do to ensure financial success, but it is usually the last thing people think about. If you don't set goals, how do you know if you are actually being successful? If you are going to get to where you want to be in life, you have to know the path to take. Goals are your roadmap and if you set them up right, they will take you from point A to point Z with as few detours and as little pain as possible.

How to set goals

The key to goal setting is to make your goals concrete and measurable and to make meeting them automatic. By this I mean, your goal should have a date and amount associated with it. You don't just say “I want to pay down my debt.” You say "I want to reduce my debt by $5,000 over the next 12 months." By giving yourself a set $ amount and date to meet, you will be able to judge whether you are actually meeting your goals or not and make adjustments accordingly.

By making it automatic, I mean using technology to your advantage. Set up automatic payments for all of your bills so that you are never late. Set up an automatic deduction from your pay check that goes directly to your savings account so that you are paying yourself first and will be less likely to spend the money instead of saving it.

Just doing those two things:

1) Making your goals concrete, and 2) Making them automatic,

will drastically increase your chances of success.

The timeline

Goals can be divided into 3 categories: Short-term, Mid-term and Long-term. Short-term goals are goals that will be completed within the next 12 months. Mid-term goals are ones that will be completed within the next 1-7 years. Long-term goals are goals that will be completed 7+ years from now. Some examples could be:

• Short term – establish emergency fund of $1000
• Mid-term – pay off consumer debt within 3 years
• Long-term – have enough for retirement

One of the biggest challenges is being realistic! If you only make $40k/year, it won’t really do you much good to set goals that will cost you $20k/year to meet. Be honest with yourself about what you can do. If you find that you are ahead of your timeline for meeting your goal, you can always add another one or meet your goal early but if you find that you are behind, it can be disheartening and cause you to give up all together.

The process

As I mentioned above, to set your goals you have to set specific criteria as well as an action plan. Please open the accompanying excel workbook and click on the Goal Summary tab. I have taken the liberty of filling in some goals for you that should be on everyone’s list. Remember, that your goals don’t all have to be responsible. Your goal can be to buy a new TV or to go on a vacation. Doing this just means that you will be more likely to meet your goal without sacrificing something else. For your personal goals, fill out the following information for each goal:

1. Goal Name
2. Start Date
3. End Date
4. $ Needed
5. First Step

If you are married or in a similar relationship, you should do this with your partner.

Once you have set at a few goals in each category, print out that page and put it somewhere you will see it every day. It will remind you of what you are working towards and keep you on the right path. I would also suggest writing your most important goal on a sticky and attaching it to your credit card so you have to see it any time you want to use your card. That way you will know that every penny you spend on that card is a penny that is not taking you closer to your goal.

Make a plan

Now that you know what your goals are you need to plan how to meet them. In the same workbook is a tab called Detailed Goal. You should make as many copies of this as necessary – one for each goal. I would recommend re-naming the worksheet to reflect the name of your goal.

Implement your plan

So, you’ve gone through all the planning, now you just have to execute. The key to achieving your goals is to make them as easy to do as possible. This means making everything automatic. Set up all of your goals so that you don’t even have to think about them. Use auto bill pay and auto deductions to your savings. It takes a bit of time at first but it will be worth it in the long run.

Monitor/Add to your goals

Your goals are always going to be changing. You should keep adding goals as they come up. When you add a new goal, you have to look at your existing ones and figure out which is more important. It may be that your new goal is more important than one of the old ones so your old one gets pushed down the list. Look at your goal list as a fluid thing and don’t try to be too rigid with it. There is nothing wrong with reprioritizing as thing change.

DOWNLOAD EXCEL WORDSHEET

by personalfinance101.org

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