When you’re young, it’s easy to feel like you have all the time in the world to make those responsible, boring, good-for-you decisions. You may understand on an intellectual level that it’s important to eat healthy, for instance, but actually doing it is another story. The problem is, you won’t start to feel the consequences of that decision until you’re much older.
It’s the same with money. You can spend your twenties using up every last penny of your paycheck on food, fun, and fashion, but you’ll regret those choices when it comes time to take out a mortgage or start a family.
Finances, like health, depend on your day-to-day habits and choices. Just like with adopting a new diet or exercise regimen, it’s best to start with the basics and progress from there. Here are some of the most important financial moves you can make as a new grad to get off on the right foot.
1. Look at your credit report
Your credit report is the basis of your financial life. It tells lenders, service providers, and potential employers how reliable you are with money.
When you look for an apartment, the landlord will run a credit check. If your credit is below their standards, they may deny your application or ask for a cosigner.
Utility companies, cell phone providers, and car insurance companies may charge less if you have a good credit score. Having a good credit score also makes it easier to refinance student loans or buy a car.
First, check your credit report at AnnualCreditReport.com. This site will show your credit report from the three credit bureaus, Experian, Equifax, and TransUnion. Because of the Covid-19 pandemic, consumers can check their credit report for free once a week until April 2021.
According to the Federal Trade Commission, one in five people will have an error on their credit report, so it’s important to view your report regularly.
You can monitor your credit score for free at Credit Karma. Sign up to receive regular alerts or set a calendar reminder to check your score weekly.
2. Open a credit card
If you don’t qualify for a regular credit card because you haven’t yet established a credit history, you should open a secured credit card. This is a card that requires a small deposit, between $50 and $200, that acts as collateral for the credit card company.
Using a secured card and paying it off every month, on time and in full, will increase your credit score over time. This will make it easier to apply for rewards and travel credit cards after you graduate. Take a look here for our suggestions on the best credit cards for college students.
Avoid keeping a high balance on your credit card. Ideally, you should have a balance that is 10% of the credit limit or less. If your credit limit is $200, that means having a balance no more than $20.
One popular strategy is to use the credit card only for a small recurring bill like your Netflix or Spotify subscription. Then, set up automatic payments every month so you never miss a due date.
3. Create a student loan repayment plan
Borrowers with federal student loans have access to a variety of repayment plans. These include extended plans with 25-year terms and income-driven plans that are based on your salary.
You can use the official loan simulator from the Department of Education to see how these different options will affect your monthly payment.
In general, a longer plan or income-based repayment option will result in more interest than the standard 10-year plan. However, some borrowers prefer a plan with a lower monthly payment because it fits their budget better. You can change your repayment plan at any time.
Some borrowers may also be eligible for the Public Service Loan Forgiveness (PSLF) program. This program forgives any remaining student loan balance after 10 years of payments, as long as you’ve worked for the government or an eligible nonprofit organization during that time.PSLF is a complicated program with many rules, so be sure to read through the eligibility requirements carefully.
You may also want to refinance your federal and private loans to a lower interest rate. When you refinance federal loans, you waive benefits like income-driven plans and deferment and forbearance options, so most people should only refinance private loans.
4. Start an emergency fund
An emergency fund will help you pay for surprise expenses like a trip to the emergency room, plane tickets for a funeral, or buying new tires for your car.
The best time to start saving an emergency fund is before you actually need it. Most financial experts say you need between three to six months’ worth of expenses in your emergency fund.
Make a list of all your necessary bills like rent, car insurance, utilities, groceries, and any monthly loan payments. Then, multiply that figure by how many months you want to save for.
Keep your emergency fund in a high-yield savings account, separate from your everyday checking account. This makes it harder to dip into the emergency fund for nonessential expenses.
A high-yield savings account has a higher interest rate than a traditional savings account. Many online banks have high-yield savings accounts that are easy to open and have few fees.
5. Create a budget
A budget helps you see where your money is going, which is crucial for graduates with low incomes and high debt totals. Creating a successful budget means being realistic with your monthly expenses while trying to save for your goals.
Start by making a list of all the categories you spend money in, like housing, transportation, food, and entertainment. Then, assign an amount for each category.
Next, pick a time once a week to categorize your transactions and see how much you’re spending. Remember to adjust your budget when expenses change, like if your rent increases or your car insurance premium decreases.
Find a budgeting system that works for you. Mint is a popular free tool with a mobile app and a desktop version. Consumers who want more data on their spending may enjoy using Tiller, a spreadsheet-based budgeting system. You can also use an old-fashioned notebook if you prefer writing transactions manually.
Reap the benefits for years to come
A few bad money choices can follow you well into adulthood. But managing your finances when you’re young can set you up for long-term success and provide financial freedom.
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