Few commencement speakers tell the graduating class what they really need to know, which is how to manage money. A handful of financial lessons will help the recent college graduate become more successful.
Get schooled on financial literacy. Read a good book about financial literacy, such as Beth Kobliner’s Get a Financial Life: Personal Finance In Your Twenties and Thirties or Suze Orman’s The Money Book for the Young, Fabulous & Broke. Also, subscribe to Consumer Reports.
Establish good credit by getting a credit card and managing it responsibly. It is much easier for a college student to obtain a credit card after reaching age 21. Credit card usage is reported on the borrower’s credit history, while debit cards are not. Pay off the credit card balance in full each month. Be careful about spending too much, since spending $500 with a credit card feels the same as spending $5. Repaying student loans on time can also help build a good credit history. Get a free copy of your credit reports at www.annualcreditreport.com.
Prepare to start repaying student loans. Most student loans have a six-month grace period before repayment begins. But, it is easy to forget about student loans, what with various start-up expenses, such as paying security deposits, utility deposits, furnishing an apartment, buying a business wardrobe and putting a down payment on a car. So, get organized with a student loan checklist and add a reminder to your calendar two weeks before payments will be due. (If you don’t receive a statement or coupon book by then, call the lender for instructions on how to make a payment.) Be sure to update the lender with any changes in mailing address, telephone number, email address and other contact information. Sign up for auto-debit to reduce the likelihood of being late with a payment and to get a discount (typically a 0.25% or 0.50% interest rate reduction). Choose the repayment plan with the largest monthly payment you can afford, ideally a standard 10-year repayment term. Accelerate repayment of the loan with the highest interest rate to save the most money. If eligible, claim the student loan interest deduction on your federal income tax returns.
Be careful about loan consolidation. Consolidation can streamline repayment by combining multiple student loans into a single loan, but it does not necessarily save money. Consolidation prevents the borrower from targeting the highest-rate loan for quicker repayment. Federal consolidation loans are no longer necessary to lock in the current interest rates, since the interest rates on federal student loans are already fixed. Private consolidation loans may save money, but only after the borrower has had a chance to build a very good or better credit history.
Build a descriptive budget by tracking all expenses for at least a month. Get a receipt for everything or record expenses in a small notebook or on a smart phone. Then, transcribe the expenses each evening in a spreadsheet, on Mint.com or in Quicken. Assign the expenses to broad categories, such as food, clothing, housing, transportation, medical care, entertainment, insurance, student loans and taxes. Also, classify each expense as mandatory (need) or discretionary (want). Be realistic when classifying expenses. Cell phones and cable TV are luxuries, not necessities. Increasing awareness of spending is the first step to exercising control. People who budget are less likely to live paycheck to paycheck.
Build an emergency fund for unanticipated expenses, such as job loss, unexpected medical bills and expensive car repairs. Save about 6 month’s salary and at least $1,000 in an accessible bank account. If you lose your job, don’t be too picky about your next job. Don’t wait for the perfect job. It is easier to get a job if you have a job. Don’t quit an existing job if you do not have a new job in place. If you can’t find a job, volunteer with AmeriCorps to earn education awards that can help pay down student loan debt.
Start saving for retirement, even though it may be 40-50 years in the future. Save one fifth of your income for the last fifth of your life. Maximize the employer match on contributions to your retirement plan, as that’s free money. Live below your means, so you have the means to live later.
Get insured. College graduates can stay on their parent’s health insurance until age 26. Many new employees get health insurance through their employer. Auto insurance is required by most states. Renter’s insurance and homeowner’s insurance can protect personal property against theft or catastrophic damage. Life insurance is only needed as a form of income replacement when you are supporting a spouse and children. Then, get term life insurance, not whole life, as it is less expensive and more cost-effective.
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