Recent college graduates often don’t know how to prioritize financial obligations. Entry-level salaries don’t often go far, especially when there are bills and possibly debts to pay. Which debts should you pay off first? How much should you aside for emergencies? And what about retirement? A few guidelines on how to manage your money after college:
Pay off high interest debt first
High interest debt, often credit card debt, is the worst kind of debt to have hanging over your head. Interest can cause the debt to increase so quickly that it becomes impossible to pay off. Therefore, paying off high interest debt should be your first priority. After paying for your necessities (rent, utilities, food, etc.) start paying as much as possible on your high interest loans and credit cards.
Create a small emergency fund
A small emergency fund is essential for everyone, even if you don’t think you have money to save. Cut back on any extra expenses, find a roommate, or bring in extra income if necessary. You never know when your car will need repairs or you’ll experience a medical emergency. Ideally, an emergency fund will have at least $1000, but don’t feel discouraged if you can’t save that much right away. Just keep putting aside extra money-even if it seems like an insignificant amount- and you’ll eventually build a nice cushion for unexpected expenses.
Maximize retirement contributions
Many employers match retirement savings or contribute some amount to an employees retirement fund. Pay as much as possible into your companies retirement plan as soon as you are allowed, because an early start is the key to a healthy retirement fund.
Pay off low-interest debt
Make the minimum required payments on your low interest or no-interest debts. These may include subsidized loans or medical debts. If you can make more than the minimum payments, that’s great but only do so after taking care of the items above.
Set aside six months to one year of living expenses
As the recent economic downturn taught us, job loss can happen to anyone. The last thing you want to worry about while unemployed is how you’re going to pay the rent. The ability to pay your expenses will prevent additional stress and allow you to fully focus on finding a new job. Saving an entire year’s worth of living expenses may sound impossible, but it can be done with patience and time. Break your goal up into smaller increments. First aim for three months of expenses, then six, and finally one year.
Setting financial priorities and following through with financial goals is important part of success after college. It may require sacrifices to pay off debt and to save for the future, but good financial planning will not only provide security, but it also can prevent one of the most common causes of stress.