5 Financial Moves For Recent College Grads

Financial Moves For Recent College Grads
GUIDE
Andrea Woroch
By: Andrea Woroch
Updated: June 15, 2021
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Earning a college degree is essential to success for many reasons, but perhaps the two most important reasons are long-term financial gain and job stability.

The U.S. Bureau of Labor Statistics (BLS) found that college graduates with a bachelor’s degree earn an average of $524 more per week than workers who only have a high school diploma. And college graduates earn approximately $1 million more over their lifetime than those who lack a postsecondary education, according to the U.S. Department of Education.

Meanwhile, college graduates also face lower unemployment rates. Only 5.5% of workers with a bachelor’s degree were unemployed in 2020, compared with 9% of workers who only had a high school diploma, according to the same data from BLS.

Given these statistics, it’s easy to make the case that college is a necessary step to creating a better life, but this doesn’t mean it comes without financial risk. With 55% of college students taking on debt to pay for their education — and the average student loan topping $37,500 in 2020, as reported by the Federal Reserve Bank — earning a bachelor’s degree can be a major financial burden.

But ultimately, there are more upsides than downsides to earning a degree, and making a few savvy financial moves after graduation can pave the way to an even healthier financial future.

Here are five simple money moves every college student should make after graduation.

1. Build an Emergency Fund

Saving money may fall toward the bottom of your financial priority list upon graduation, especially if you are carrying thousands of dollars in student loan debt. But building an emergency fund is one of the most important steps to avoid debt now and in the future.

This savings fund will help you pay for unexpected bills like a dental emergency or car accident without having to borrow money or rack up a balance on a high interest credit card. And, since most student loans provide a grace period of six to nine months after graduation before payments must be made, there is plenty of time to begin putting money away toward this savings fund.

Build an Emergency Fund

Aim to save at least three months of living expenses as an emergency fund.

Find out when you will be required to begin repaying your student loans and make a plan to stash away some of your earnings or even monetary gifts received at graduation. Aim to save at least three months of living expenses. Better yet, open a high-yield online savings account, which offers better returns on your savings, so you make something on the money just sitting in your account.

For instance, VIO Bank currently offers 0.57% annual yield percentage (APY), which is much higher than what traditional banks offer these days.

2. Stick to Your College Budget

When you land your first gig out of college and receive your first paycheck, you will likely feel a tremendous amount of financial relief. After all, this may be the first time in several years you have money to spend without worrying about fishing quarters out of your couch to pay for dinner.

There’s nothing wrong with enjoying a splurge from time to time, but don’t fall into the trap of increasing your living expenses with each paycheck you receive. Limiting your daily and monthly living costs now can greatly improve your finances later.

Stick to the college budget you’re already used to and use the extra money from each paycheck to pay down student loans and any other debt you’ve accumulated.

To achieve this, set a household budget. Begin by outlining your monthly take-home pay and subtracting your fixed monthly expenses, such as rent, cable, and internet, along with variable expenses including things like groceries, healthcare, and gas, ensuring you are not spending more than you make.

Your goal should be to lower your living costs so you have more money to put toward debt and savings. You can achieve this by getting a less costly apartment in the outskirts of town, finding a roommate or two to split the bills, and buying used items.

Keep in mind, the sooner you pay off your debt and build adequate savings, the sooner you can enjoy a life free of financial restriction.

3. Start Planning For Retirement

When you land your first job after college, retiring from that job is likely the last thing on your mind, especially since the average predicted retirement age is 66, according to a 2018 Gallup survey.  However, the sooner you start saving toward retirement, the less you will have to put away each year to enjoy a comfortable life later.

One of the most basic steps is to sign up for your employer-sponsored retirement plan, such as a 401K, as soon as you’re hired. Contribute up to at least the amount your company offers to match, typically around 3% to 4%, since this is like free money.

Sign up for your employer’s retirement plan as soon as you’re eligible.

If choosing a fund to invest in intimidates you, don’t put it off or it may be years before you revisit it and miss out on compounded interest during this time. Instead, speak with someone from your human resources department to help set up your plan and seek advice on which funds to invest in.

If you’re feeling overwhelmed with the options, a target date fund can be a good place to start. There are pros and cons that come with these funds but starting somewhere is better than nowhere. Plus, you can always change your investments later.

As you continue advancing in your job, consider increasing your retirement contributions with each raise and bonus to ensure maximum returns later.

4. Transfer Your Credit Card Balance

In addition to student loans, some college graduates also have to worry about paying off big credit card bills. In fact, a 2019 study from Sallie Mae found that 57% of college students have and regularly use a credit card, and have an average monthly balance of around $1,423.

Though student loan repayment may be delayed for several months after graduation, credit card debt doesn’t receive this same grace period. If paying off your balance in full isn’t an option, consider moving the debt to a new credit card offering 0% interest on balance transfers.

Such promotional offers typically provide 12 to 21 months, depending on the credit card, to pay down the balance you transferred without accruing interest. This strategy will help you save money and pay off your debt faster since you won’t have extra fees eating up your payments.

5. Determine Your Student Loan Repayment Options

As mentioned earlier, most student loans have a grace period of around six months after graduation before the first payment is due. Though this seems like adequate time to find a job and figure out your finances, the time flies by.

Just remember that no matter your situation, you have payment options, and it’s always better to call your lenders to figure out the best plan rather than just ignoring your payment. This can have long-lasting consequences on your credit file, making loans more expensive and harder to obtain in the future.

Visit studentaid.gov to explore your student loan repayment options.

Figure out what payment options are available to you by doing a little research. You can find out more about these options at the U.S. Department of Education’s Federal Student Aid website.

You may qualify for an income-based repayment plan, such as the Pay As You Earn (PAYE) plan, which is offered to borrowers who have high debt relative to income. With the PAYE plan, monthly payments are capped at 10% of a borrower’s income, and any unpaid balance will be forgiven after 20 years.

Whatever you do, though, think twice about deferring student loan payments, especially if you’re earning income. Since interest continues to accrue during deferment periods, you will end up with a bigger balance and pay more in the long run.