6 Money Tips for Recent Grads

When you graduate from college, you have an amazing opportunity to set yourself up for financial success. 

You'll hopefully be joining the ranks of the working world for the first time with a job that pays you a reasonable salary and makes full use of the degree you earned. And, while you may have student loans to pay back, options like debt consolidation and income-driven payment plans could give you the freedom and flexibility to pay them back on your own terms. 

The money decisions that you make now, when you are first establishing your financial life, are going to shape every aspect of your future going forward, from whether you are able to save for retirement to whether you can live within your means and avoid high-interest loans that leave you in need of debt relief later. 

You obviously want to make the right choices to set yourself up for success. These six money tips can help you to get on the path toward growing your net worth so you can maximize the chances of building a strong financial future. 

1. Create a Budget

Establishing and sticking to a budget is essential for long-term financial health and one of the most important money tips for recent grads. If you make a budget, you can ensure that you are using your money as wisely as possible—including doing important things like saving for your retirement and for big purchases you'll need to make later. 

You can also avoid going into debt if you live within your means and don't overspend.

To make your budget, calculate the amount of income you bring home from your new job so you'll know how much you can spend each month. Next, add up your necessities like rent, utilities, transportation, groceries, and debts. If there’s nothing left over to save at the end of the month, you'll need to make changes, like living somewhere cheaper, getting a roommate, opting for less-expensive transportation, or finding a second source of income. 

When you make your budget, treat saving as a must-do expense. Aim to save a minimum of 10% to 15% of your income, or even 20% if you can. If you start this habit early once you start earning a salary, you can set yourself up for great success in the future. It's also easier to make a habit of saving if you start living on less than you earn early on. 

After accounting for fixed expenses and savings, you can plan to spend the remaining portion of your income on discretionary expenses for things like clothing and entertainment. Ideally, your budget will end up looking like this:

• 50% to fixed expenses

• 30% to discretionary expenses

• 20% to savings and debt repayment

This is called the 50/30/20 budget, and it’s a simple, effective approach to distributing your money that ensures you are growing your net worth over time.  

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2. Limit Your Fixed Expenses

If your income goes up as a new college grad, it's tempting to expand your spending and live a more lavish lifestyle. Try to avoid this temptation. If you can continue living frugally or living like a college student for a little longer, you can save more at a younger age and take advantage of the power of time to grow your net worth.

Your fixed expenses are the recurring expenses that you must pay each month. They include things like your housing costs and your car payment.

If you can get an apartment that is $100 cheaper per month, for example, that's $100 extra to save each month that you can put toward savings or something you enjoy.  

3. Manage Your Debt

Another important money tip for recent grads is to get a handle on managing debt. 

Credit cards in particular can make it tempting to spend money you don’t have. Don’t fall into that debt trap and let it hold you back from achieving financial freedom. If a credit card purchase you’re considering doesn’t fit into your budget, reconsider whether you really need it. If you’ve accumulated credit card debt, create a plan to pay it off as fast as you can.

When you have high-interest debt like credit cards, it’s important to reduce your debt load as quickly as possible. Getting out of debt will help free up your money so you can make more of the investments you’ve been planning for. You need to be honest about what you owe and what it will take to pay off your debts, and dedicate yourself to tackling repayment.

If you have low-interest debt like some student loans, though, it doesn't always make sense to pay it off early. It may be smart to pay the minimums on this debt if you expect to earn a higher return by investing. For example, if your student loans are manageable, it could make sense to put your extra money toward getting your employer’s 401(k) match, rather than making extra payments.

4. Protect Your Credit Score

A low credit score can seriously limit your opportunities to make a big purchase, secure an apartment lease, or obtain a loan. Though employers won’t see your actual credit score if they check your credit, information on your credit reports—like missed payments or high levels of debt—could even keep you from landing your dream job. 

Each person’s credit score is calculated based on five factors: payment history, how much you owe relative to credit available, the length of your credit history, your credit mix (having a combination of credit cards and installment loans, for example), and the number of inquiries on your report (inquiries are placed on your credit record when you apply for credit).

Protect your credit score by:

• Paying your bills on time and in full each month. If you’re more than 30 days late on payments for credit cards or loans, you’ll likely see your credit score drop, and you could also get hit with fees.

• Paying down your revolving debts, like credit cards, as quickly as possible and keeping your balances below 30% of your available credit.

• Keeping older credit cards open (unless they charge an unreasonable annual fee) to build a long credit history.

• Avoiding the temptation to apply for multiple credit cards or lines of credit within a short time.

Ultimately, your credit score will affect almost every major financial decision in your life. The better your credit, the more money you’ll save in the long run.

5. Establish an Emergency Fund

No matter what stage of life you’re in, it’s crucial to have a stash of money set aside for the surprises life throws your way. This is one of the best money tips for recent grads. Your emergency fund will help tide you over if you face a job loss, unexpected medical bills, or run into other financial emergencies.

It’s okay to start small, but eventually, you’ll want to give yourself a financial cushion of at least three to six months of living expenses saved in a high-yield savings account. 

Emergency funds are so important that you should prioritize saving up for emergencies even if you’re paying off credit cards or other high-interest debt. Otherwise, you could get trapped in a debt cycle of paying off debt and then borrowing again when you face surprise costs. 

Try to save up at least a small emergency fund of at least one month’s expenses before paying extra to your creditors to avoid getting trapped in that cycle. Then, you can split extra money between building up your emergency fund and paying off debt.

6. Start Saving for Retirement

Even though retirement is probably decades away, the earlier you start saving, the better. Compound growth makes it much easier to build a nest egg over long stretches of time since your money will earn money for you as you reinvest it. The returns you earn on your investments can be reinvested, making your principal balance larger and ensuring your investments earn even more over time. 

There are different kinds of retirement accounts you can invest in. Many employers sponsor retirement accounts, like a 401(k), for their workers. But even if you don’t have access to an employer-sponsored retirement account, you can open an individual retirement account (IRA) through a broker.

You can often choose between a traditional account or a Roth account. Traditional accounts usually provide an upfront tax break for retirement savings, though some higher earners may not be eligible to deduct contributions to a traditional IRA. But keep in mind that withdrawals from a traditional 401(k) or traditional IRA are taxed as ordinary income.. 

Roth accounts allow you to defer your tax breaks until you’re 59 1/2 and have had the account for a minimum of five years. While you don't get to deduct contributions when you make them, you can take out money tax-free in retirement.  If you don't have a very high salary right as you start your career, contributing to a Roth account can be ideal if you don’t need the upfront tax break. Since you have time on your side, compounding could help your money grow into a sizable tax-free nest egg by retirement.

Regardless of what type of account you choose, always aim to take advantage of any 401(k) match your employer offers.  Matching contributions means your employer puts money into your account when you do. Not contributing enough to get your 401(k) employer match is like leaving money on the table.

Consider automating your savings so you have one less thing to remember. Most 401(k) contributions are automatically withheld from your paycheck. But setting up automatic transfers from your checking account to your emergency savings account and IRA can make it easier to work toward your other financial goals.

Some banking and investment apps let you round up purchases to the nearest dollar, with the extra change going to savings or investment accounts. Soon, you won’t even miss the extra cash, and your money will be there for you when you need it.

Financial Management 101 for Recent Grads

Following these money tips for recent grads can help you maximize your savings over your lifetime. It's worth the effort to get started on the right foot when it comes to managing money, as the decisions you make as a recent grad are going to shape your finances for years to come.