Graduating college is thrilling and quite an achievement. But as you put your cap and gown away, your mind begins to wonder what is next. You’re instantly thrust into the so-called real world of deciding where you’ll live, pursuing a career, and taking on many new responsibilities. One area you want to get right immediately is managing your finances.
As you prepare to make your own money moves, it’s important to handle your finances responsibly. Here are some tips to help you start laying the foundation and build strong financial habits that will guide you through this transitional period.
Build a Budget That Works for You
Love it or hate it, a budget is one of the most effective means of managing your money responsibly. Adulthood is filled with new expenses, many of which will pop up at the most unexpected of times. Being prepared financially is crucial.
It’s important to note that budgeting is not a one-size-fits-all approach. Just because a particular strategy works well for one person doesn’t mean it’s ideal for you. Begin by listing all your monthly incomes and expenses. Then, create a plan to track your expenses. People often overestimate how much they make and underestimate the amount they spend monthly. So, leaving a little wiggle room in the first months is wise as you fine-tune your approach.
Here are some common budgeting methods that you can use and modify to align with your needs:
- The 50/30/20 Rule:
This strategy splits your budget into three categories:
- 50% of your income goes toward needs (e.g., housing, utilities, groceries)
- 30% is earmarked for wants (e.g., shopping, dining out, entertainment)
- 20% is left for financial priorities (e.g., savings goals, investing, paying off debt)
Many favor this approach because it provides a basic budgeting framework and the flexibility to tailor the proportions to fit your needs.
- Zero-Based Budgeting:
This method is more involved and less flexible but allows you to pinpoint exactly where your money is going and how it will be spent. With zero-based budgeting, you assign a role to every dollar you earn so that you have $0 left at the end of the month.
For example, you will designate precisely how much you will spend in each category, such as bills, groceries, entertainment, transportation, etc. This level of planning gives you a clear view of your finances and ensures accountability for each dollar earned.
- The Envelope System:
While this budgeting approach comes across as basic, it’s very effective. In its traditional form, you would create an envelope for each spending category and fill it with cash for that month’s expenses. Once the money is spent from that envelope, it’s gone until next month – unless you transfer money from another envelope into that one. This visual approach to money management allows you to physically see your money being spent and helps you avoid frivolous spending. The virtual approach is to setup multiple secondary share accounts with LMFCU. Each secondary share account represents a specific “envelope” You may transfer money between these accounts using mobile or online banking.
Create an Emergency Fund
Unexpected expenses are inevitable. The best way to avoid being caught off guard is to prepare. An emergency fund is money you set aside that you can easily access in a financial emergency, such as car repairs, medical expenses, or other unforeseen costs.
Your emergency fund fulfills two important roles: 1) it ensures you can cover unexpected expenses without throwing your finances for a loop, and 2) it helps you avoid costly alternatives like payday loans or credit card cash advances.
The best way to grow your emergency fund is to automate the process. With payroll deduction, you can allocate a portion of each paycheck to be deposited into your savings account. Or you can use automatic transfers and schedule a specific amount to transfer into your savings account on a certain date monthly. Both options provide a hands-off approach to saving regularly.
Safeguard Your Credit Score
Your credit score is one of the most significant numbers of adulthood. This three-digit number not only helps you become approved for loans you need. But it also determines your financing costs. An excellent credit score could help you save hundreds or thousands of dollars in interest depending on the loan type and amount.
While you might not need to borrow money now, your actions today will affect your finances down the road. Always strive to pay your credit card balance in full monthly and create an actionable plan to reduce longer-term debt on time.
Start Investing Now
When it comes to saving for the future, time is your greatest ally. The sooner you begin saving and investing, the more time your money can earn interest, compound, and grow. Even if you can only afford to put aside small amounts initially, that’s perfectly fine. Over the years, those smaller deposits can grow into a significant sum.
Many financial accounts come equipped with tax advantages, such as IRAs and 401(k)s. Because these accounts have tax perks, you’re limited by how much you can contribute annually. So, the sooner you begin investing with these accounts, the more you’ll be able to save throughout your career.
Don’t Try to Keep Up with the Joneses
One of the greatest challenges upon joining the so-called real world is temptation. You and your friends will be entering the workforce and likely making more money than you’ve ever had before. With that comes the temptation to spend frivolously. Social media proves FOMO is very real, and watching your friends buy into the latest fads, take luxury trips, or purchase fancy cars can be tough to ignore.
However, one thing people often overlook is how others pay for these luxuries. Many have high levels of credit card debt at a very young age. Others aren’t putting any money aside for their future. What you see in-person or online doesn’t tell the whole truth.
You can still treat yourself – after all, you work hard for your money. But make sure your purchases fit into your budget so that FOMO doesn’t turn into a financial regret down the road.
We’re Here to Help!
As a recent college graduate, many doors are waiting to be opened by you. The world is yours to explore, and we’re sure you’ll do many wonderful things in life. While it might not be as exciting as finding your first apartment or landing your dream job, learning to manage your finances responsibly is crucial.
If you want to learn more about how we can help you save more or the tools available to better manage your money, we’re ready to help. Please stop by the Credit Union or call 800-410-0501 to speak with a team member today.
Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.
6/5/24
