After years of studying, term papers, and exams, you've finally emerged from college with a degree in hand. Now all you need to do is figure out how you'll navigate the real world and manage the money you'll hopefully soon be earning. The good news? By avoiding key errors, you can set yourself off on the right financial foot. Here are a few mistakes you should steer clear of at all costs.
1. Not following a budget
Without a budget, you'll have no good way of knowing where your money is going month after month. Once you get your first job, carve out a little time to set up a budget that maps out your monthly expenses and compares your total spending to your total earnings. This way, you'll see if you're overspending in certain categories, and you'll know where to cut back. Don't forget to include a line item in your budget for savings -- that's something you should prioritize at every stage of life.
2. Not having an emergency fund
Just because you're new to the working world doesn't mean you won't face your share of financial hiccups. You could lose your job shortly after signing an apartment lease, get hurt and rack up medical bills, or face an issue with your car that you can't afford to put off. Without money in the bank, you may have no choice but to charge such expenses on a credit card, accumulate costly interest, and damage your credit in the process. A better bet, therefore, is to build an emergency fund -- one with enough money to cover a minimum of three months of essential living expenses, and ideally, more like six months' worth. That way, you'll have cash to tap when unplanned bills pop up.
3. Taking on too much rent
As a general rule, your housing costs should never eat up more than 30% of your income, whether you're renting or buying a home. Now if you're a recent graduate, chances are, you aren't leaping into homeownership anytime soon, which means you'll benefit from a predictable monthly housing payment. (Your rent will be fixed, whereas homeowners bear variable costs, like maintenance and repairs.) Still, you don't want to rent an overly expensive home, because if you do, you'll have less money available for other important things, like savings, student loan payments, and, oh yeah, the fun stuff you'll want to enjoy during your free time.
4. Not understanding your health benefits
Hopefully, you'll get hired by a company that offers a solid health insurance plan whose premiums are affordable and whose deductibles are low. Before you start using that health plan, however, make sure you really understand what your benefits entail. For example, you may need a referral to see a specialist, or you may have to stick to in-network providers to get your services covered at all. If there's something about your health plan you don't understand, call the number on the back of your insurance card and speak to an agent about it. Otherwise, you could end up with unwanted medical bills on your hands.
5. Not signing up for your company's 401(k)
If your company offers a 401(k) plan that you're eligible for right away, it pays to sign up for a couple of reasons. First, most employers that sponsor 401(k)s also match worker contributions to varying degrees, so if you don't participate, you could end up losing out on free money. Secondly, if you start setting money aside for retirement as soon as you get out of college, you'll give your savings a lot of time to grow. Imagine you start socking away $200 a month in a 401(k) beginning at age 22. If you continue doing so for 45 years, and your investments earn you an average yearly 7% return (which is doable if you load up on stocks), you'll wind up retiring with $686,000. Wait just five years to start saving, and you'll only have $479,000 for your golden years. Granted, that's still a lot of money, but a far cry from $686,000.
The money moves you make post-college are crucial to your long-term financial success. Avoid these mistakes, and you'll be golden.