Welcome to the Real World
College seniors often experience many different emotions upon graduation. There’s the relief that they made it through, the sense of pride in all they’ve accomplished, the happiness found in the friendships they made, the sadness that the party is over, and the fear of everything that is about to happen…
WELCOME TO THE REAL WORLD
Gone are the days of meal plans and room & board, and of someone else footing the bill. Now you get to buy groceries and cook for yourself, unless of course you want to spend your entire paycheck on Seamless. Oh, and there’s this thing called rent, for most people it makes up between 30% and 40% of their total monthly income; and don’t forget about student loan payments! Your loan providers will generally wait between 6 months and a year before they start siphoning money out of you, but on average you can expect to pay around $280 per month.
LET'S TAKE A LOOK AT HOW THIS PLAYS OUT
The average starting salary of a new college graduate in the US is about $50,556, which equates to $4,213 per month BEFORE taxes. Once the government get its cut and your company takes out for things like health insurance, you’re looking at about $3,000 per month. Assuming your rent accounts for 35% of your income, you’re out another $1,100, well $1,200 once you account for utilities. So, what’s left? $1,800. Doesn’t seem too bad, right? How about after that student loan payment of $280 kicks in? $1,520. Now factor in your groceries, your social life, your gym membership, furnishing your new apartment, your cell phone, a car payment, gas, insurance, and a new work wardrobe. How does that $1,500 look now? Think you will be able to save anything? Will you be able to contribute to a 401k?
Starting out can be very tough and although a college education is extremely valuable, it doesn’t necessarily prepare you for life after college. While all of this might seem scary you should know that there is hope! Here is a list of tips to get you started on the path to financial stability.
- Don’t move out right away if you don’t have to.
No one likes the idea of moving back home with mom and dad, but the reality is it can help save you upwards of $10,000 in just one year. If your rent plus utilities is $1,200 and commuting from home costs $300, that’s a difference of $900 per month. Is moving out truly worth that much?
- If you don’t have the option to live at home, you should hold off on contributing to a 401k or employer sponsored retirement plan right off the bat.
While this might be a complete departure from conventional wisdom, you need to think about it practically. You may have 45 years until retirement, but probably only 10 years until you want to buy a home. Often times, recent grads will bulk up their monthly 401k contributions at the expense of building an emergency fund or starting to save for near term goals. Once the money goes into the 401k you can’t get it until you are 59 ½ without a penalty. Doesn’t it make more sense to put that money in a savings account so you can build up an emergency fund first, BEFORE you start worrying about retirement?
- Student loans are obviously a burden on this generation, and there is a stigma around having them.
The reality however, it that you have already received the benefit from these loans (going to school) and it is cheap debt when you compare it to the interest rates on credit cards or personal loans. Don’t rush to pay back your loans, especially not when you are just starting out. Take advantage of the flexible Federal repayment plans if you can and choose an income based repayment or a 20-year term instead of a 10-year term. Too often, college grads want to be rid of their debt so they direct all of their extra income towards the loans, forgo saving and end up needing to open credit cards to finance their lives. They trade in their 6% debt for 25% debt and that is when they really get into trouble.
- Save!
At a minimum you should be saving 10% of your gross income. Based on the average starting salary of $50,556 this equates to a minimum of $5,056 per year, or roughly $421 per month. You should figure this out BEFORE moving so you know how much rent you can truly afford. Going back to the earlier example, after rent, utilities, and student loan payments you are left with $1,520, and if you plan to save $421 a month, this leaves you with $1,099 for everything else. Can you afford to make all of your other obligations and still have money left over for food and fun? If not, maybe delay moving out until you find a way to lower you monthly expenses.
- Even though you are warned of the evils of credit cards, they do still serve an important purpose in your financial life.
Whether it makes sense or not, you need to have a credit card in order to have good credit. So get one, and sooner rather than later. As a rule of thumb, you should never use more than 30% of your total credit limit. So if you have a credit card with a $1,000 limit you should never charge more than $300 at any given time. Always makes the minimum monthly payment and pay off your balance in full every month. If you won’t be able to afford it in 30 days when the bill is due, you shouldn’t buy it. Following these credit card tips will help you learn how to be responsible with credit and help to build up your credit score so that you will be eligible for better rates on things like mortgages and auto loans later in life.
These tips will help guide you through this difficult transition and set the groundwork for future financial success! It might not be easy, and sometimes it won’t be fun, but your future self will thank you for making financially fit decisions today!