It’s no secret that personal finance education is lacking at every level throughout our school system. And this is nowhere more evident than when you graduate from college and are thrown into a new reality you’ve spent little to no time preparing for. In fact, you’ve probably spent years taking classes on just about everything but how to manage your money.
Now, you’re tasked with making decisions that can affect the rest of your life. How do you know what to avoid? Here are a few of the most common financial mistakes new grads make, and how they can steer clear of them.
1. Ignoring your personal finances altogether
Your life is dictated by your financial situation. The sooner you realize that, the better. The first step is recognizing that you need to take an active role in learning about money management. You need to begin building a financial plan. Understanding financial concepts and forming strong financial habits now will have lifelong benefits.
Your financial plan is flexible and can change often, especially early on in your career and life. But now is the time to begin thinking about short-term, medium-term, and long-term financial obligations and goals. Take time to learn about important financial building blocks, like starting an emergency fund, beginning retirement contributions, and paying back student loans.
Make personal finance part of your everyday life now, and do one thing every month to increase your financial knowledge. (See also: The Financial Basics Every New Grad Should Know)
2. Overspending on your current lifestyle
Most likely, you’ll be earning more money at your first post-college job than you ever have before. And it’s OK to adjust your lifestyle from college student status to adult. But be realistic about the lifestyle you can really afford.
When you get your first paycheck, look it over to understand exactly what taxes you’re paying and how much you have deducted for benefits like health insurance and retirement savings. Next, build a budget to cover your essential monthly expenses, savings, and debt repayment. Consider how much you have left in your budget to allocate toward your lifestyle expenses. If you’d like more money in this area, either cut back on your living expenses, perhaps by looking for a cheaper place to live, or find a way to bring in more income.
As you’ll soon learn, every year you get older, your financial priorities will increase — often significantly. Time is one component of your financial plan that you can’t get more of, so take advantage of these early years to focus on saving as much as you can. (See also: 4 Smart Things You Should Do With Your First Real Paycheck)
3. Delaying saving for your retirement
Besides paying for your current lifestyle, the number-one priority of your working years is saving for a time when you’ll no longer be working. You are never too young to start saving for retirement — but at some point, you may be too old. Oddly, we’re never taught in school about what retirement means or about how to save for it.
The biggest determinant of retirement security is your personal savings. Whether you contribute to a workplace retirement plan like a 401(k), your own IRA, or both, make a contribution count for every single year beginning with your first job. (See also: 5 Retirement Accounts You Don’t Need a Ton of Money to Open)
When you first start out, it’s OK to set small savings goals and work on them throughout your career. For example, use every increase in salary as a time to increase your saving rate by at least half of your salary raise. And every time you change jobs, never decrease your saving rate — either stay at the same rate or take the opportunity to increase it. It’s not unrealistic to think that you may spend 30 years or more in retirement — and it can take you just as long to save up for that goal. (See also: 5 Biggest Ways Millennials Risk Their Retirements)
4. Neglecting your student loans
If you’re a recent college graduate, there’s a good chance your loans make up part of the $1.5 trillion student loan debt owed in this country. While you may be tempted to ignore your loans until repayment is set to begin, or because you’re overwhelmed by how much you owe, you need to take an active role in understanding everything you can about your loans.
First, determine what type of loans you have: federal or private. Next, if your payments haven’t already begun, find out when you will need to start repaying. You’ll also want to know the total amount owed and the interest rate on each of your loans. Then, begin researching different payment and consolidation options. (See also: What’s the Difference Between Student Loan Refinancing and Consolidation?)
Finally, build your loan payment into your budget early on and take strides to pay it off as quickly as you can, perhaps even using bonuses and tax refunds to pay down your principal balance. Gone are the days of thinking of your student loans as “good debt” and letting them hang over your head for your entire career. Many people are now finding out what a burden they are in retirement. (See also: How to Keep Student Loans From Wrecking Your Retirement)
5. Taking on credit card debt
A good credit history is an important part of your overall financial health. And credit card use is a viable way to establish that history and demonstrate your credit worthiness to lenders. But responsible credit use is charging only what you know you can pay off at the end of every month — not buying items that you can’t afford in the first place and financing them at very high interest rates over several years. (See also: The Millennials Guide to Avoiding Credit Card Debt)
Entering the world of adult finances is tricky. Between learning about your budget and cash flow, building your emergency savings and retirement accounts, and figuring out how to manage your loans and debt, consider the above advice Personal Finance 101 — a mandatory course for everyone.