5 Financial Tips for Recent College Graduates

"The Graduates" by Sakeeb Sabakka. CC BY 2.0.

As a recent college graduate, I know how intimidating personal finance can be. Fortunately, there is a wealth of (free) knowledge online to serve as a starting point for a sound financial education. Here are a few tips I've gathered from friends, family, experience, and online resources to help college graduates (and non-graduates) from any background.

1. Maximize savings on large, recurring payments
There are dozens of sites and apps to help you navigate and keep track of spending – personally, I like Mint.com. Take a good look at your credit and debit card spending and calculate where your money is going as a percentage of your total spending. The biggest portions are your heavy-hitters: rent, food, insurance, loan payments, transportation, etc. Rent is commonly the single most expensive bill you will have to pay on a monthly basis. Keep in mind that it may be unwise to pay more than about one-third of post-tax income on rent. First, be open to trade-offs. The apartment that you're touring may not be in your dream neighborhood, but let's say it's $200 cheaper per month and transportation is only $40 more per month. That's nearly $2,000 in net savings per year. Second, sign a longer-term lease. A year-long lease is generally given at a lower rate per month than a shorter-term lease. If you were able to live in a college dorm room for a year, you can sign for an apartment for a year. Research your own heavy-hitters and look to reduce them where possible.

2. Look to save on smaller, frequent purchases
According to a 2012 study, roughly two-thirds of the working population in the U.S. regularly buys lunch. Who spent the most of this group? Respondents aged 18 to 24. Let's say your average lunch out costs $10, while packing food from home costs $5. If you regularly invest the savings of brown-bagging it in a retirement plan, assuming 4% annual price inflation and reasonable returns of about 8% per year, you would be looking at almost $530,000 in additional retirement savings after just 40 years. Now, this isn't to say that the occasional lunch out will ruin your financial well-being. Instead, simply avoid making it part of your daily routine.

You can apply this concept to any number of frequent, unnecessary purchases including -- brace yourselves -- specialty coffee, cocktails, late-night food, taxis over public transit, happy hours, and much more.

3. Carefully select a location to live
Some may not have the luxury of moving to a city of their choice. However, those who do may be in a particularly fortunate situation. LinkedIn recently published a ranking of cities where droves of recent graduates have made their home: San Francisco, Chicago, New York City, Minneapolis-St. Paul, and Washington, D.C. It is true that most of these cities offer a higher median salary compared to the national median. However, an attractive starting salary can be deceptive. New York, San Francisco, and Washington, D.C. are all in the top ten most expensive cities based on the Cost of Living Index. While some companies with multiple offices around the country will adjust for cost of living in entry-level salaries, many do not. A study conducted by Salary.com showed that many employers with multiple locations spread the pay evenly across all cities. The researchers cite numerous factors besides cost of living that affect how a salary is set, including labor scarcity, amount of employee travel between office locations, and industry standards. In other words, there could be a significant differential between salaries in different cities once adjusted for cost of living. For example, if you're working as an entry-level analyst for a big firm in New York, you could be paid the same as your colleague working in a different city -- except your colleague will keep more money in his or her pockets.

4. Invest for retirement, even if you have student loans
Many people make the mistake of paying off their low-interest student loans long before it is necessary or even recommended. Setting aside about 10% of every paycheck for retirement is ideal, but this may not be possible in every case. Many employers offer to match 401(k) contributions up to a certain percentage – the median rate for all Vanguard plans is 3%. By contributing less than the full matching amount, you are forgoing free money. Not to mention that you can expect both your additional savings and the matching funds from your employer to bring home returns in the neighborhood of 8%-10% per year over the long term. Student loan rates are far below this expected return, especially considering that your employer isn't throwing free money your way, so it may be unwise to focus on paying off loans before the due date. Don't underestimate the power of compound interest; by waiting just 10 years to start saving for retirement, you could be cutting your retirement savings roughly in half.

5. Maintain a high credit score
If you don't have a credit card at the moment, you should consider applying for a basic card. A strong credit history will be a valuable asset when you look to take out a mortgage or car loan. Not all debt is created equal. While carrying along some student loans is nothing to lose sleep over, credit card debt can wreak havoc on financial plans. According to Bankrate.com, the average annual percentage rate, or APR, hovers between 13% and 17% across all providers and cards, but it can be much higher. Cash advances on a credit card can carry an even higher interest rate. Paying exorbitant credit card interest rates should be avoided at all cost. Credit card debt will also worsen your credit score, which in turn affects how you might finance a car, house, or business in the future. Dispose of this debt as quickly as possible and adopt good practices to make your plastic work for you.

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