You’ve finally done it. Four (or more) years of working hard, studying into the wee hours and subsiting on PB&Js: all worth it. You’ve earned your walk down the aisle to receive your college degree.
If you’re like most college students, one of the biggest changes you’ll face as a graduate is that you’ll now have money . Your new job will likely pay much more than you’ve ever made, so what will you do with your newfound, hard-earned cash?
Before you make too many plans for exotic vacations, sports cars and mini mansions, it might be helpful to consider how you’ll manage your new, higher income. Here’s a financial plan to help you transition from college graduate to full-time employee.
Create Financial Goals
Before you get too far down the path, map out your financial goals.
What do you want your life to look like from a financial standpoint? Do you want to be able to retire early? Reach millionaire status?
Consider the people around you and learn from their money successes and mistakes, then use that information to help you create some financial goals of your own. Set short-, medium- and long-term goals, write them down and post them in a place you’ll see them daily.
Creating financial goals that are important to you will help you to minimize thoughtless waste of your money.
Make Saving a Priority
Most college graduates enter the workforce with few financial responsibilities. Still single and earning a nice starter salary? Now is the perfect time to develop the habit of saving a percentage of your paycheck.
Designate a certain dollar amount of each paycheck for savings, and if your employer offers it, have the money directly deposited into a savings account. Automating savings makes it tricky to spend those dollars, and you likely won’t even realize they’re gone.
[See: Your Month-to-Month Guide to Savings.]
Learn to Live Within a Budget
Some people knock budgets as being too restrictive, but the truth is that budgeting is a powerful way to help you meet your financial goals.
In order to set a budget that works for your specific situation, list all of your fixed monthly expenses (think rent and transportation costs) and your fluctuating monthly expenses (such as groceries and entertainment funds) and set a reasonable amount to spend monthly on each expense. Then, take any leftover money after you’ve budgeted for all expenses and commit to putting it toward reaching your financial goals.
[See: 11 Expenses Destroying Your Budget.]
Start Investing for Retirement Now
As a new grad, retirement probably seems impossible to picture. But it sneaks up faster than you think.
By choosing to start maximizing retirement investing now, you’ve got the power of compound interest on your side, which will help your retirement funds grow to amounts larger than you could have dreamed of.
If you have an employer-sponsored 401(k) plan, begin contributing at least up to the employer match amount. Also, consider contributing to a traditional IRA or Roth IRA to increase your retirement savings even more.
Forget the Joneses
It’s easy now that you have a substantially bigger paycheck to start dreaming big and buying stuff . Many of your fellow graduates will be making large purchases such as new cars and homes, and it might be tempting to follow suit to make up for years spent living without.
However, every large purchase you make pushes you months — and sometimes years — away from your financial goals.
If you get tempted to start keeping up with the Joneses, revisit your written financial goals and remind yourself why they’re so important to you.
This doesn’t mean you’re not allowed to have a little fun; it simply means you need to be sure that your designated fun spending aligns with your true financial dreams.
Understand the Risks of Carrying Debt
In this “I can afford the payment” world, carrying debt is considered normal by most people. But what you need to understand is that the money you lose by paying interest and by not being able to grow that money via investing can be substantial.
For instance, if you accrue a balance of $5,000 on a credit card at an 11.9 percent interest rate and only pay the minimum due of 2 percent of the balance, it will take you over 21 years to pay that credit card off and you’ll have paid more than $4,400 in interest over that 21-year period.
To add to the cringe factor, if you would have invested that $5,000 for 21 years at a mere 7 percent rate of return, you would have had over $20,000 in your investment account.
So in reality, that $5,000 credit card purchase cost you nearly $25,000 when you include the loss from not investing that money and from interest paid. If you can learn to view debt from this standpoint — often called opportunity cost — you can use that knowledge to avoid carrying large amounts of debt.
[See: How to Live on $13,000 a Year.]
Experience the Benefits of Giving
Giving a portion of your income to a cause that you care about has several benefits. First, it helps you make a difference in the world. Second, it helps you learn not to be overly attached to money. Third, qualifying donations can help minimize your tax bill and save you money.
Last but not least, generosity breeds rewards that will benefit you for a lifetime. Learn early to be generous with your newfound income and experience the rewards it brings on so many levels.
By heeding these seven money tips as a new college graduate, you’re setting yourself up for success both in money and in life.
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7 Things College Grads Should Know About Managing Money originally appeared on usnews.com
