Congratulations! You’ve made it through the starving student years and now you’re ready to start a job and earn some real money. You’re probably thinking about all the things you’ll be able to buy, places you’ll go and things you’ll be able to do when those paychecks start rolling in.
Not so fast. If you’re like all the people who just assume they’ll figure things out as they go along, you’ll probably end up just like them— in debt. But if you’re smart about your money, you’ll end up way ahead of the game.
Plan Ahead, Double Your Money
Okay, I admit it. For most of us (except maybe some of the business majors) planning sounds boring, boring, boring. But what if I told you just a few hours with a paper and pencil might help you double your savings and investments? Research by the Consumer Federation of America and NationsBank found that people with incomes as little as $10,000 to as much as $100,000 who reported having a written financial plan, had twice as much money in savings and investments as people who said they didn’t have a plan. Now does it sound a little more interesting?
You’re probably not ready to hire a financial planner yet, but you can take a few hours to think about your goals — what you want, how much you need and how you plan to get there. Write down what you want, figure out how much it will cost and then look at how you can get the cash to get it. You probably have a lot of goals right now, like buying a car and vacationing in the Caribbean, but it’s unlikely you’ll be able to get it all immediately. Be honest. If you can’t swing as much as you’d like right now, scale back a little. Just put away what you can and don’t fall into the trap of thinking that if you can’t afford something you can just borrow to get it. Otherwise, you’ll wind up with a big chunk of that paycheck going to lenders every month.
A good exercise is to take one month to track every expenditure you have — every soda from a vending machine, coffee, snack, lunch out, pack of gum that you buy. After you spend a month doing this, you will be able to see areas where you can cut back on spending: drink coffee at home rather than buying it at work, bring a soda from home and pack a lunch regularly. Make going out to lunch a treat rather than the norm.
Where Does the Money Go?
Your salary may seem like a lot of money at first, but wait until you see how far it goes — or doesn’t go! Along with the new feeling of having a regular income will be the experience of paying expenses that you’ve never had before. Before you even get your hands on your earnings, Uncle Sam and the other tax guys are going to take a nice chunk out of those checks. Then you’ll have all kinds of living expenses, not to mention the things you just want. One study by the student financing organization Sallie Mae found that the average college grad needed to earn $38,512, before taxes, just to support his graduation debts and financial obligations. Ouch!
So the first thing is to hold off on big purchases until you get a realistic picture of how much you need to cover your bills and still leave some spending money. There may be some expenses you’ll overlook until you actually start working (clothes for work, travel, food, subscriptions). You may be surprised at how fast your money goes, especially if you were living in a dorm and eating through a dining plan at a college cafeteria. Housing, utilities and food cost a lot. The U.S. Department of Agriculture states that a man between the ages of 20 and 50 should spend between $126 and $250 a month on food, and a woman between the same ages should spend between $115 and $227 a month. So try to get a few months under your belt before you start spending freely.
Generally, before making any big changes in your financial picture, you should have enough money saved to be able to live for three to six months without an income. This is a good amount to cover any unexpected emergencies, layoffs or if you decide this job just isn’t for you.
Getting Around Without Going Broke
You gotta have a new set of wheels, right? And the car dealer will probably tell you that you can get into a great car with really low monthly payments. But wait a minute. Those wheels will cost you a lot more than you probably realize. In fact, the average car will cost you nearly half a million dollars over your driving lifetime!
How is that possible? Well, cars cost a lot more than the payments. There’s insurance, gas and maintenance, and they all add up. Before you let a new vehicle drive you to the poorhouse, think about your alternatives.
- Buy a good used car. A good used car that holds its value could be your best bet. That way, if things don’t work out at your current job, you’ll be able to sell it for at least as much as you owe. And, of course, it will cost less over the long run.
- Forget a car and use public transportation. If you really need to use a car for out-of-town trips or special occasions, consider renting one. It will be cheaper than owning one for a year.
- Share a car. Organizations are popping up all over that allow you to use a car for just a few hours when you need one. Visit www.carsharing.net for more information.
Whatever you do, avoid buying or leasing a car that will obligate you to pay big monthly payments. What happens if you don’t like your new job or it doesn’t work out? How will you make the payments then? Also, steer clear of four and five-year car loans. If you need to sell the car after a couple of years, you’ll probably find that you are “upside down” (owing more on the loan than the car is worth).
Paying for That Education
The six-month grace period on your student loans may give you some breathing room, but those six months fly by. Find out what your payments will be and figure them into your spending plan. Also, consider paying extra each month to pay them off faster. You can always send in a few extra dollars with your payments and, over the long run, they will really add up.
Different lenders have different options to pay off student loans, but if you have a federal student loan, you generally have the following repayment options:
- Standard Repayment Plan. You make fixed monthly payments of at least $50 over a fixed period of time — up to 10 years. Under this plan, you would probably pay the lowest total interest because the repayment period is shorter than that of the other plans.
- Extended Repayment Plan. This plan gives you more leeway by extending repayment over a period of The six-month grace period on your student loans may give you some breathing room, but those six months fly by. 12 to 30 years, depending on the total amount borrowed. You would still pay a fixed amount each month of at least $50, but monthly payments are probably less than under the Standard Repayment Plan. Remember, however, that you will probably pay more interest because the repayment period is longer.
- Graduated Repayment Plan. Under this plan, your payments start small and increase every two years. This gives leeway to recent graduates whose incomes start low but increase steadily. The repayment period lasts 12 to 30 years, depending on the total amount borrowed. Again, if you use this repayment plan, you will probably pay more interest because the repayment period is longer.
- Income Contingent Repayment Plan. This plan bases monthly payments on your income and the total amount of federal loans that you borrowed. Your monthly payments adjust with your income — the lower your income, the lower the payment and vice versa. You would have up to 25 years to repay your student loans. After 25 years, any unpaid amount would be discharged but you will have to pay taxes on the discharged amount.
If you have a private student loan, contact your lender to find out your repayment options. If you run into trouble and can’t make your student loan payments, you may have several options until you’re back on your feet. If you have a federal loan, you may be eligible for a deferment or forbearance.
These options are only available to you if you talk with your lender before you fall behind on
your payments, though, so you have to ask before you’re too strapped.
A deferment allows you to postpone making payments on your loan (and even cancel certain federal loans) if you meet specific eligibility requirements.
Some of the requirements for deferment or cancellation are:
- Economic hardship
- You work as a full-time elementary or secondary school teacher in a designated area serving low-income students; you teach children with disabilities; or you teach math, science, foreign languages, bilingual education or other fields designated as teachershortage
areas. (The Department of Education annually publishes the
- Directory of Designated Low-Income Schools for Teacher Cancellation Benefits. Check your school’s financial aid office for this directory.)
- You are a student in school
- You are a parent or working mother
- You are a full-time professional provider of early intervention services for the disabled or a full-time employee of a public or nonprofit agency providing services to lowincome, high-risk children and their families
- You have a temporary total disability, and
- You are unemployed.
Depending on the type of federal loan you have, the federal government may or may not pay the interest accruing during the deferment period. If you must pay the interest, you can do so by making interest-only payments during the deferment period or you can let the interest accumulate and be added to the loan amount when the deferment period ends.
Even if you have other unanticipated personal or health problems but don’t meet the requirements for a deferment, you may be able to get a forbearance of loan payments. During a forbearance period you may make no payments or reduced payments. Interest will continue to accrue during the forbearance period and will be added to the loan amount when the forbearance period ends.
Home Sweet Home
Tired of dorm living or a crowded group house? Ready for that dream apartment, or maybe even a house? Before you sign a lease on a new place or even start house hunting, take some time to choose the best digs for your dollars. If you are having a problem affording a lease, you can look for a landlord who will give you a break on the rent in exchange for you doing some work on the place. Whatever route you take, living alone or with roommates, try to avoid long-term lease commitments until you are sure your job and any roommates will work out.
If you want to live on your own, look at all the expenses in the picture. Do you get free parking? Are utilities included in your monthly rent? If utilities are not included, your housing expenses will increase substantially. You may have bills for power, gas, telephone, water, and if you get cable, you add another $30 or so to your expenses each month. If utilities are not included, you need to pay attention to things that will jack up your power bill. Take into account such considerations as whether you’re in an older home, whether you have an air conditioning unit and whether you have central heat.
If you go the roommate route, you need to take care to protect yourself. There are plenty of horror stories out there about people who weren’t careful and ended up with huge financial responsibilities. Make sure that all roommates are on the lease, so that everyone is equally responsible for the lease payments. Be sure you are confident that your roommates can afford their share of the lease payment. Keep in mind that each person listed on the lease will be liable for the full lease payment if another person on the lease doesn’t pay his or her share.
A lot of people mistakenly think that they don’t have to worry about their roommate’s financial behavior. Be aware that any late or nonpayment of rent caused by your roommate can affect you for a long time. Even if your late rent payments don’t show up on your credit report (and stay there for the seven-year reporting period), they will hurt you when you are ready to move into a new apartment or house. Also, you could end up losing your deposit if your roommates damage the property or skip out on the lease.
You should use the same caution with your utilities. If you get the utilities in your name, you are responsible for all payments due, and it is up to you to get reimbursed by your roommates. If you try to hold out and wait until your roommates are ready to pay their share and the payment is late, this late payment can be reflected on your credit report and hurt you later in life, even though it wasn’t really “your fault.”
To protect yourself and make sure your bills are paid on time, you should come up with a system with your roommates. Some roommates put different utilities in different roommates’ names, so that no one person is personally responsible for all utility bills. The roommate in charge of a particular bill can divide the bill amount by the number of roommates and require each roommate to pay his or her share at least 10 days before the actual due date to make sure the bill payment is sent on time. You can have “bill night” where all roommates get together, order pizza and pay the bills.
Another way to make sure all roommates are protected is to have each roommate put a certain amount of money in an account, totaling $500 or so, to cover unexpected emergencies. If a utility is in your name, be sure to have your name removed from the account when you move.
A great (although usually unattainable) option for college grads with the time, energy and money is to buy a house that needs some work and fix it up. Although low down payment loans are available, if you decide to move in the next few years, you could wind up owing more than your house is worth. A larger down payment can keep you out of that trap. If you can rent part of it to roommates, you may end up with a great, low-cost investment on your hands.
Those credit cards may seem like your passport to the good life right now, but nothing will sink you faster than an overloaded wallet that’s always getting a workout.
Here’s the reality: credit cards are great for convenience and to help you out in a jam, but if you run up a lot of bills you can’t pay quickly, you’ll pay a hefty price for that convenience.
The chart below shows how much you’ll pay in interest alone and how many years (in parentheses) it will take you to pay off a balance if you only make the minimum payment on your credit cards:
It’s a pretty good bet that two major credit cards will be enough. You can use one for day-to-day purchases that you pay in full every month. The other card should have the lowest interest rate you can find, and you’ll save that one for real emergencies when you know you won’t be able to pay it off right away.
If you don’t have a major credit card when you graduate, it’ll be tough to get that first one. This is truly a case where you’ll find out that it takes credit to get credit. If you find yourself in that bind, consider a secured credit card, which is a major credit card that requires a security deposit. Pay your bills on time each month and it shouldn’t take long to build a good credit rating and get all the credit you want.
Protect Your Credit Record
A lot of recent graduates make the mistake of charging up now with the expectation that they’ll be able to pay it all off later, when they are making the big bucks. They believe that they’ll get a high paying job soon enough and, at that time, they’ll have no problem paying off all their debt in full. That may or may not be true, but regardless, those months or years of nonpayment will be on their credit report for at least seven years.
Your credit report is your key to your good financial future. Anytime you need credit — for a mortgage, an auto loan, a credit card, student loans for graduate school, even getting a lease on an apartment — your creditor will look at your credit report to determine if you are a good credit risk. Some recent graduates who don’t pay attention to their credit reports now will get a big surprise later when they want to buy a new car and can only get an auto loan with a 20 percent interest rate.
According to the Fair Credit Reporting Act, negative information stays on your credit report for seven to ten years and can continue to be reported indefinitely to prospective lenders, insurance companies and employers if you apply for a loan or insurance for more than $150,000, or for a job that pays $75,000 or more. You keep your credit report clean by consistently paying your bills on time and having a reasonable amount of debt and open credit. The more consistent your payment history in your credit report, the better credit risk you are.
It’s a good idea to get a copy of your credit report to see what information it has. There may be inaccurate information in the report that you should dispute. A dispute form should accompany the credit report, and you should include a copy of any documentation you have that shows the information is wrong.
To order a consolidated copy of your credit report, containing information from all three credit reporting bureaus, visit GetOutOfDebt.org online.
Get Ahead Now
Now’s the time to start saving and investing for your future. “But I have no money!” you complain. C’mon. Do you really think it’s going to be easier “someday?” The more you make, the more you’ll want to spend. So get in the habit of saving now. Starting early means you’ll have to put aside a lot less to reach your goals than if you wait.
Here’s an example from The Truth About Money, a great book by Ric Edelman. Suppose you’ve set a goal of having $100,000 socked away by retirement at age 65. (You’ll need a lot more than that, but this is just an illustration.) If you start saving at age 20, assuming a 10 percent return, you’ll need to put aside only $9 a month. If you wait until you’re 30, you’ll have to invest $26 a month; at age 40 it becomes $75 a month; and if you really procrastinate, at age 50 you’ll have to sock away $239 a month. Starting early pays off big time!
If you’re intimidated by investments, consider starting an investment club or joining one in your area. Generally, there are a lot of tools that you can use to save, including mutual funds, money market funds, investing in stocks, traditional and Roth IRAs, or simple savings accounts.
One of the easiest ways to save is to have money taken directly out of your paycheck. An example of this is a 401(k) plan through your employer. A 401(k) plan is a great way to save, especially if your employer matches your contributions.
Matching works as follows: let’s say you put 10 percent of your gross monthly paycheck (before taxes) into a 401(k) account; your employer would put in a matching amount into your account. After a certain vesting period (during which time you must continue working for that employer — maybe two to five years) the matching amount is guaranteed.
If your employer offers a 401(k) plan, find out the following:
- How much does your employer match? Some employers don’t match at all, however if yours does, this is free money you are passing up if you don’t participate.
- What is the total amount you can contribute to the 401(k) plan?
- How long you must work before you can start contributing to your 401(k) plan?
- How long the vesting period is?
- How well the funds have performed?
If your employer does match, a 401(k) is one of the best saving tools you have for retirement.
Whatever investment tool you choose, start saving something now. That means today!
When the Going Gets Tough
Not everything will be smooth sailing from here on out. You can’t predict what may happen; you could become ill and have to leave work, or your job may not be there forever. If you’ve kept yourself out of too much debt and saved part of every paycheck, you’ll weather the storms a lot easier.