Graduating from college or university and heading out into the great wide world is a truly exciting time, full of promise and potential for a bright, unwritten future.
As you start this new stage of life, you may have some questions about how to handle your finances moving forward. How important is it to pay off student loans and other debts? When is too soon to start investing or saving for the future? What’s the best way to build a stable financial footing?
Recent graduates can help set themselves on the path for a lifetime of financial security and stability by following a few simple pieces of advice. Here’s what to know about money as you move on from post-secondary education and into the next phase of life.
Track your spending with a budget
For many people, the months after graduation are a time for finding work and, perhaps, a new place to live. As your income and living costs change, update your budget (or start a new one if you didn’t have one as a student) so that you know how much of your paycheque is going towards rent, transportation, clothes for work, cell phone and internet, other fixed costs, and fun times such as shows or dinners with friends. You may need to adjust some spending amounts to pay off loans and other debts, and to find a few extra dollars each month for long-term savings.
Don’t let debt drag you down
While there are some types of ‘good’ debt, as we wrote about in an earlier blog, most debts are to be avoided or paid off as soon as possible. When we’re not saddled with debt, we increase our financial flexibility and freedom, making more money available for the things we care about in life.
If you have debt, as many students do upon graduation, start by making a plan for how you’re going to pay it off. Even if you can’t afford to devote much of your monthly income to paying down debt, contributing even a little is always a lot better than letting your debt spiral out of control, especially if you’re paying interest.
Another word of caution about debt for graduates who start earning wages for the first time: be particularly wary of credit card debt, which comes with punitively high interest charges. The intoxication of an income occasionally leads to regrettable spending choices that can take months or even years to overcome. Watch what you spend, and if you’re spending too much, take steps to control your own access to credit.
Now is the time to start investing and saving for retirement
With several decades of working years still ahead of you, the idea of thinking about retirement planning might feel premature when graduation is still a recent memory.
Still, while the end of your career looks a long way off, there’s no reason not to start planning now, and make the most of all that time to build and grow your nest egg. An extra decade of investing now could double the amount of money you’ve saved once you reach retirement.
A general rule of thumb is to put between 10 and 20 per cent of your income aside for long-term savings. Given the lengthy time horizon of a recent graduate, you can afford to be a little more aggressive with some of your investments, taking chances on riskier choices that offer the possibility of higher returns. If even a few pay off, your retirement planning could soon be off to a strong start.
Add safety and security with an emergency fund
Financial experts often espouse the value of building an emergency fund to handle unforeseen costs and expenses, or to help carry you through a period of unemployment. If you can put together an emergency fund worth between three and six months of salary, you’ll be in good shape. Keep adding to your fund over time, if you can, and try to boost its value to the equivalent of 12 months of salary. Once the cash is built up, stash it in a high-interest savings account as a hedge against inflation – they key is putting it somewhere where it earns at least a little in interest, but is always accessible without any fees and penalties.