For New Graduates, Living on Your Own – Financial Basics: 101

As we get nearer the end of the spring semester, the many colleges and universities of the nation will be setting free their graduating class. With that graduation and new-found freedom, comes responsibility! Part of that responsibility is your taking control of your personal finances and to do it early is one the most important things you can do to get you house in shape!

I’ve worked with many students in my own experiences that have forgone any want for financial acumen until it is too late. Although many, the two most common oversights I’ve been witness to are; 1) not realizing that your salary will have many deductions yet calculate living expenses on gross pay and, 2) not accounting or forgetting the fact that after the 6-month grace period of graduation, in November, student loans are suddenly showing up at the door asking to be paid!

Below are some steps and tips to consider that will help as you are charting out your new, post-graduate, personal and financial existence and get a leg up on living independently.

Budgeting

It is very important to become financially literate and the earlier the better! Mind you, this does not necessarily mean having to understand the complexities of Derivatives being manipulated on Wall Street work or the nuance about foreign exchanges. This DOES mean learning about how to manage your own situation and money and accounting for your living expenses in the foreseeable future.

The first step to living responsibly is to budget your money. Although many people have negative feelings towards budgeting, because they feel it is constrictive or controlling, you should realize that budgeting allows you more freedom through understanding. By choosing where you are going to spend your money before you spend it, you are taking control of your future.

To begin budgeting, first thing to do is identify all of your anticipated expenses. Add up your fixed essentials. Examples are your rent, utilities, phone, transportation, health insurance, student loans and a car loan, if there is one. Also consider your variable expenses like food and groceries, entertainment, clothing, etc.

Build a descriptive budget by tracking all of your expenditures for at least a month’s time. Track every dollar spent and record it in a small notebook or spreadsheet. Categorize the expenses into broad categories, such as food, clothing, shelter, transportation, medical care, student loans, insurance, taxes and entertainment. Also label expenses as to whether they are fixed costs (needs) or discretionary costs (wants). At the end of the month, compare your spending with your income and make adjustments from there. Just being aware of how much you are spending will help you exercise control.

Start to build an emergency or rainy day fund to cover unanticipated expenses. Typically this should be at least $500 to $1,000 and eventually 3-6 months’ salary in a bank account or other liquid investment. The goal is to save enough money to cover your expenses until you get a new job if you were to lose your job.

Managing Your Accounts

Managing your money from day to day is essential to finding financial freedom. Once you start working you have more flexibility with your money. You will have more money to spend, and more opportunities to borrow money. You should take these added opportunities seriously. If you have accumulated credit card debt while in college you should work on getting out of debt now. You should also learn how to manage the credit resources that you have available to you now.

Finding Your First Apartment

Once you have graduated and lucky enough to have found a job, you may then need to find housing. Unless you’re fortunate to be in a position to stay with family, you’ll need to secure your own place. One thing to understand about getting your first apartment is that it’s not just paying rent. To get into one, you may be looking at 1st month, last month and a security deposit also. Usually, the deposit is one month’s rent so feasible you’re looking at 3 month’s rent upfront just to walk in the door. Not uncommon today is needing referrals and/or going through a credit check to get a place of your own. Once in, you may find that additional costs are utilities (heat/gas/oil/electric), garbage, water and insurance (read below for renter’s insurance!)

Paying Student Loans

If you borrowed money to attend school, six months after graduation, in the November of your graduation year, those loan companies really prefer that you start making an effort to repaying so they come knocking at your door. If you’re carrying more than one, you may save money on your loans by consolidating them and locking in a lower interest rate. Additionally you may need to consider other payment options if your budget is tight.

First thing to do is get organized. After four years in college, most undergraduate students graduate with a handful of loans and graduate students may have even more on tap. Compile a list of all your loans, including the name, web address and contact information for the lender, the loan ID number, the current loan balance, the interest rate and the date the first payment is due which should be the November after graduation.

A recent Fidelity Investments study found that a stunning 70% of the class of 2013 graduated with an average debt of $35,200 and that 42% of Millennials polled say their debt is “overwhelming,” according to a new Wells Fargo Retirement report. Realizing, again, that these payments start in November of your graduation year so it is best to be prepared for such as student/federal loans, if any, are ones you do not want to default on.

Insuring Yourself

Medical: Now that you are truly out on your own, you are responsible for all of your expenses and emergency situations. You should make sure that you have health insurance as one really cannot afford to not have it. Even though young, sudden illnesses can strike and accidents do happen. Insurance will help you pay the medical bills.

Under the Affordable Care Act (also known as Obamacare), you can be insured as a dependent on your parent’s health insurance plan if you’re under 26. The exception being If you can get health insurance through your own job.
If you can’t piggyback onto your parent’s plan and you don’t have a job with health insurance, starting this past January, if your employer doesn’t provide health insurance, you can now buy it through one of the new health insurance marketplaces.

Renter’s: Perhaps you’re unaware but when you secure an apartment, while the building is insured against loss, nothing of your possessions, belongings or content are included. For this, you need to buy a specific plan for renter’s called, appropriately, “Renter’s Insurance.” With this, and it’s cheap, you buy a certain dollar value of coverage, say $10,000, $20,000, whatever you feel the replacement value of your belongings are to be if in need of repurchasing (and it’s important to insure at “replacement value” not the depreciated value your policy would pay unless this is specified). This will protect you against loss; theft, fire or whatever and if something were to happen you will get value of what it would be to re-buy/get your belongings back.

Understanding debt & credit

Not only is credit a good thing but in many cases it is a necessary thing! As stated earlier, many landlords and even employers are looking at credit reports for your application. Starting out it is important to establish a credit history. In ways, the only thing worse than a ‘bad’ credit history is NO credit history. You may want to start out by getting a secured credit card and use that for purchases instead of cash and pay the bills diligently to start to build a history. Another thing to do might be to start an account with Credit Karma. It is entirely free to sign up and use and it’s a great way of managing and monitoring your credit and credit score. If possible, use credit for all your purchases, but only doing so if you can pay the entire balance off at the end of each statement period. This way, you’re building credit, staying current AND using other people’s monies for 30 days for free!

Understanding Your Benefits

Once you have your first real job, you may have all types of questions about your benefits and your salary. Benefits are an elastic thing as they vary from employer to employer. Some, the ‘benefit’ may simply be the salary you’re paid. On the other end, you may be looking at examples such as the already mentioned salary (grade or merit based), tax-deferred 401k/403b retirement option with an employer match, E.S.O.P. (employee stock ownership/option plan), pension (these are a dying entity though), annual C.O.L.A. (cost of living adjustments), medical insurance, dental, disability (short & long-term), holiday pay, vacation and personal days, travel, day care, health-club, dependent care, etc…. There are many different things that may be offered and it is important to understand what they are but also measure them in the personal importance and need when considering a particular position.

Investing for Your Future

One of the most important things you can do now is to make your money work for you. Once you’ve established a budget, any ‘extra’ monies should be started to work for you! Start investing as soon as you can and use the time you have ahead of you, and the incredible power of ‘compounding’ to make your money make money! Take advantage of your employer’s aforementioned 401(k)/403b or similar retirement plans. In 2013, workers under age 50 could contribute up to $17,500, tax-deferred, to these programs. Your contributions, deducted from your paycheck automatically, are tax-deductible and your money grows tax-deferred until you take it out later, ideally in retirement.  If possible, invest enough to qualify for the full match (the amount your employer puts in as a result of how much you contribute) and watch it grow.

These are simply some basic categories to consider and hopefully it is helpful. We at Campus To Corporate, LLC are here to help as you navigate this life-changing transition from college student/graduate to employed, successful adults in society.
Best of luck!