Everything You Need to Know About Managing Your Money After College
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The first few years after graduating from college are some of the most exciting — and financially important — times of a young adult’s life.
Learning what to do with your money can seem like an overwhelming and complicated task, especially if you’ve never done it before. I hadn’t when I graduated, and it took me way too many years to figure it out.
But you can do better than I did. Rather than waiting until you’re in your 30s, you can start laying the groundwork for a solid financial future now. Here are half a dozen or so things I would have done differently if given a second go-around.
1. Do Some Research
Those first post-college years are crucial for learning smart financial habits because what you do now will inform your choices and your relationship with money later. You can educate yourself about money with books, podcasts, websites, or talking with a financial advisor.
Try to get your information from a variety of sources and personalities, and know that the first book you read or podcast you listen to may not be a right fit. It’s like finding a wedding dress. You might have to try several on before you find the perfect one.
2. Create a Simple Budget Template
Making a budget is one of the most daunting parts of managing your money after college, but it doesn’t have to be complex.
Start by determining your take-home or after-tax income, which is how much is deposited in your bank account after taxes and other workplace deductions.
Make sure to account for all sources of income, including your regular paycheck, help from family, freelancing income, or a paycheck from a second job or side hustle.
Once you know your income, spend a month tracking your spending to get a baseline for your expenses. Make sure to track fixed expenses, like rent, transportation, utilities, and debt repayment, and variable expenses such as entertainment, eating out, and travel.
A good budget for beginners is a basic 50/30/20 plan. Here’s how it works:
- 50% of your income to needs
- 20% to debt repayment and savings
- 30% to non-essential wants
Grab a pen and paper for some quick math to figure out what amounts you should assign each category. You can also use a 50/30/20 budget calculator to see what your monthly spending categories would look like.
Other options include the zero-based budget or cash envelope system.
A zero-based budget involves assigning each dollar a spending category. Anything left over can go toward savings, paying off debt, or whatever financial goal you’re working toward.
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What’s important here is that you create a budget and track your spending with a system that feels comfortable for you. You can use an app, spreadsheet, or budget template to track your progress and periodically reevaluate your budget.
Once your budget is created, try your best to stick to it. Set weekly meetings to update your spending and check in on your finances. Keep in mind that things change. Don’t beat yourself up if you need to make adjustments as you learn more about your spending habits.
There are a variety of budgeting apps available. Most can help you track your spending, set spending goals, and receive notifications on your progress throughout the month. They can also break down expenses into categories automatically so you can see where your money is going.
3. Choose an Affordable Place to Live
Choosing where to live is one of the most important financial decisions you can make after graduation. It can be tempting to take that new post-grad salary and move into a fancy downtown apartment, but your budget may not allow for it.
Remember the 50/30/20 rule: 50% of your income needs to cover all your fixed expenses, including rent. If you spend 45% of your salary on rent, you may exceed that 50% threshold when factoring in all your other expenses.
The place you choose has to fit within that number for you to live within your means. So if that condo in Midtown is too expensive, you might have to live somewhere else.
Living with roommates is one way to get your financial footing after graduation and even afford a more desirable place. The money you save can go toward paying down debt, setting up an emergency fund, or saving a deposit for your first place on your own — when you can afford it.
4. Prioritize Savings in Your Budget
Don’t underestimate the importance of an emergency fund. This is the money that will cover you during life’s unexpected events like your car breaking down, an unplanned family emergency, or a job loss. It can also help you quit your job to pursue better opportunities or move out of your shared apartment if you experience roommate troubles.
Start by saving $1,000 and placing it in a high-yield online savings account. If you have high-interest debt (e.g. credit cards or an auto loan), a smaller emergency fund will do while you focus on paying those off.
Once you’ve paid off your high-interest debts, continue adding to your savings until you have at least three to six months of living expenses (not income) in your emergency fund. Some financial experts recommend saving up to a year’s worth of living expenses. This includes things like rent, gas, utilities, food (person and pet), debt payments, and any other necessities or regular payments.
The amount you should save depends on where you are in your finances and in life. For example, if you own a home or have kids, you should aim to save more than if you’re single and renting because your living expenses are higher.
If remembering to manually transfer money out of your account into your emergency fund is too hard, consider setting up automatic transfers. Make sure to factor savings as a line item in your budget as well. These two steps ensure that you’re saving, even if it’s $25 or $50 at a time.
5. Pay Down Debt as Quickly as Possible
The debt avalanche says you should pay off debt with the highest interest rate first. Once you’re done with that payment, focus on the next highest interest rate loan.
The snowball method, part of Dave Ramsey’s Seven Baby Steps, says you should start with the smallest balance first. Once you’re done with that loan, you’ll move on to the next smallest loan.
If you’d like to save the most money in interest over time, the debt avalanche method may be your best option. If you need small wins to stay motivated, the debt snowball might work better for you. Just remember that as you pay off one debt, add that payment to the next one until they’re all gone.
As you’re paying off your debt, try to stay away from taking on more. Avoid things like car loans or using your credit card for things you can’t pay cash for if they’re not emergencies.
You can also avoid more debt by cutting down on spending. For instance, pack your lunch for work instead of eating out every day. Look for inexpensive entertainment options, like hosting a board game night or a barbecue at home instead of going out.
6. Save for the Future
Retirement might feel like it’s a lifetime away, but thinking about it now gives you the best chance of building a robust and comfortable retirement fund.
In addition to your savings, you should be contributing enough to your 401(k) to get your maximum employer match, if your company offers one. This is free money for your retirement, so you shouldn’t pass it up. If you don’t know how much your employer contributes or how to set up 401(k) contributions, see your company’s human resources (HR) department for help.
This is also a great time to learn how to invest and start building your portfolio. Many people think you need a lot of money to start investing. But that’s not always the case.
Micro-investing apps like Acorns allow you to start investing using your spare change. When you shop with a linked credit or debit card, Acorns rounds up your transactions to the nearest dollar and invests it on your behalf.
Once you’ve maximized your employer’s 401(k) match, consider opening an individual retirement account or IRA. An added bonus of opening a Traditional IRA is that you can receive tax deductions on the money you contribute now.
However, keep in mind that you’ll eventually pay taxes when you withdraw your money later on. With a Roth IRA, you’ll contribute using your after-tax income now, but your future withdrawals will be tax-free.
7. Don’t Forget About Healthcare
One last aspect of planning that new graduates might overlook is health insurance. When you’re young and healthy, insurance may not seem necessary. But if you have an accident or unexpected illness, you’ll wish you’d planned ahead.
Under the Affordable Care Act, you can stay on a parent’s plan until you’re 26. If that’s not an option, and you don’t have an employer plan to take advantage of, consider purchasing private health insurance.
It can be expensive, and you may not ever need to use it. But in the case of something catastrophic like an accident or a major illness, it could be what saves you from financial hardships.
You Can (and Should) Still Have Fun on a Budget
It’s important to create a budget, save for emergencies, and plan for the future. These next few years are instrumental in creating a financially comfortable future. But that doesn’t mean you can’t have fun.
Although you shouldn’t put your finances at risk, it’s okay to spend some of your disposable income on things that add to your quality of life. Go to brunch with friends. Take a trip you’ve dreamed of. Attend that music festival.
But do it on a budget.