Since most universities don’t provide financial literacy education, college graduates are left with little to no knowledge when it comes to managing their money.
But conquering your financial life is just as important as landing your dream job. If you’re not keeping any of the money you’re making, snagging a sweet salary isn’t going to matter in the long run.
For those of you that have recently entered the real world and are trying your hand at this adulting thing for the first time, avoid making these mistakes that most grads are guilty of and you’ll already be ahead of the game.
Mistake #1: Spending too much money on housing
Personal finance is far from one size fits all — but there are a few popular rules of thumb that can serve as a great starting point. One is that you should spend no more than 28% of your salary on housing.
Since many of the most attractive jobs are located in cities that have a high cost of living, most grads end up spending way more than 28% on rent.
If your salary can’t compete with the pricey real estate near your office, you have a few options. The easiest and most common solution is finding a roommate to split costs with. If you prefer to live solo, you can usually find a spot outside of town that is less expensive and commute.
And last but not least, you can wait to relocate until you’ve moved up in your career. Staying local and living at home with your parents for a few years can actually give you a really solid financial foundation if done the right way.
Mistake #2: Not working student loans into your budget
If you have student loans (or any kind of debt), you may need to spend even less on housing. Financial experts recommend keeping your combined housing and debt payments under 36% of your salary.
Most student loans come with a grace period, so many grads make the mistake of finding a place to live before knowing when their repayment plan starts and how much they’ll actually owe each month.
Your student loans are a fixed cost and it’s important to factor them into your budget before signing a lease.
Mistake #3: Not saving for retirement right away
You’ve probably heard the old saying “time is on your side” and while it may sound cheesy, it’s 100% true. The math does not lie — the sooner you start saving for retirement the better.
Let’s say two people save $100 each month for retirement, but one starts at age 25 and the other waits until they are 35 to start making contributions. With a 7% average annual rate of return, the person who starts at age 25 will have more than double the amount of money in their account when it’s time to retire at age 65. Even small contributions in your 20s will yield big results later in life.
On top of waiting to save for retirement, another piggy-back mistake that recent grads make is not taking full advantage of their employer’s match. If your company will match your retirement contributions, they are offering you free money. Don’t leave your match on the table.
Mistake #4: Not saving money from the start
Like drinking water or exercising, saving money is a habit. But 80% of working Americans are living paycheck-to-paycheck because they can’t build up their savings.
It’s a dangerous game to say, “I’ll start saving later,” but so many grads make this mistake.
The better move is to start saving now, even if it’s a small amount, to get in the habit of paying yourself first. Set up an automatic recurring transfer on each payday to move some of your cash out of checking and into a high-yield savings account.
Saving shouldn’t be an afterthought or a “maybe later” thing. It should be the first move you make the moment you get paid.
Mistake #5: Not tracking your money moves
If you care about your finances and are making moves, you need to be tracking your progress. Otherwise, how will you know if you’re moving in the right direction?
The best number to use when tracking financial progress is your net worth. This is calculated by simply subtracting your liabilities from your assets. If your net worth is consistently increasing over time, that’s a sign of good financial health.
Most grads don’t pay attention to this number, but you should calculate it as soon as you start working so that you have a clear picture of your financial situation right now and can make sure you are continuing to improve over time.
