First, I want to say “congratulations” to anyone who has recently graduated from high school or college. I have been there, I have done that, and I know that I do not want to have to do it again!
You will engage in some new experiences as you move further into the “real world.” Some experiences will be great, while some experiences will not be so nice.
Recent graduates will be presented with a wide variety of challenges. As if finding a job is not hard enough, you will need to learn how to manage your personal finances. You may have taken some personal finance classes in high school and college, but how much of that material do you remember? How much of that material is still relevant today?
Let me help you with the personal finance staff! This post is step 1.
Learning to manage finances is a challenge, but it is a necessary challenge to overcome.
When you wake up 20 years from now, would you prefer…
- Being behind on debt payments, underwater with your house, confused with how insurance works, living paycheck to paycheck, and stressing about holiday spending
- Having no debt except maybe a mortgage, have equity in your house, understanding the insurance world, living comfortably, and being ready to handle any and all expenses like a champ
Here is some basic advice to help you get started on your journey to financial fitness. Consider me your personal trainer.
Set a budget…TODAY!
A budget is not a straight-jacket; it is simply a plan. It is a plan for you to accomplish your financial goals, whatever they may be. Studies show that people who set goals accomplish more than many non-goal-setting people combined. By writing your goals, you increase your likelihood of accomplishing your goals from 4% to 44%, according to Brian Tracy.
Ultimately, you need to understand how much you make and how much you spend. Plan out each paycheck, plan out all expenses, and get a clue where your money is going. If you do not know where your money is going, then magic ants will come to carry it away! Okay, maybe not. But it will seem like that is the case!
Pay off your debt!
Paying off debt is very important. If you are coming out of college, you likely have student loans. Let’s just hope that is all the debt that you have!
According to Thomas Stanley, author of The Millionaire Next Door, debt is the largest hurdle to becoming wealthy. Approximately 85% of surveyed millionaires stated that becoming and staying debt-free is what helped them become wealthy.
As a part of your overall financial plan, set some goals to pay off your debt. Set realistic time frames, determine how much money you will need to pay towards your debts each month in order to accomplish your goal, factor that into your budget, and stick to it. Simply paying the minimum is not good enough!
Save for retirement!
I am sick of people bemoaning that 401ks and IRAs do not work. The fact of the matter is that 401ks, IRAs, and related retirement plans do work extremely well… if you actually use them!
If you are just starting out, invest even a small amount of money. Start out by investing $50 per month for retirement (or whatever you are comfortable with). Later, you can increase the amount that you invest to as much as 15% of your income. Your goal should be to reach 15% of your income by the time you reach age 30. I call this strategy “EASE into Retirement Investing.”
Ultimately, you need to build up the habit of saving for the future. This is a crucial step to becoming financially fit!
Wait on home ownership.
Do not rush it! Too many people dive into home ownership because “it is what people do.”
The reality is that home ownership is a luxury and a huge responsibility. Aspiring for home ownership is definitely great, but jumping the gun can be dangerous. I have quite a few blog posts related to this topic. Please check them out!
For now, be content with renting while you work towards a solid financial foundation.
Finally, have fun! After you have paid for the necessary expenses, saved some money for retirement, made an extra debt payment, and have a plan set in stone, ENJOY YOUR EXTRA MONEY!
This is the motivator. What is the purpose of working hard for your money if you never get to enjoy it? As long as you can afford it, enjoy the fruits of your labor.
Obviously if you cannot afford to spend money, then do not spend money. But if you can afford it, then there is absolutely nothing wrong with having a little fun. Just do not go overboard! Do not chase the dragon! Have fun, but do so responsibly.