When I graduated college, I thought I had my finances figured out. Since I had experience with paying rent and saving money, I assumed I was all set for my “adult” life. Turns out I ended up making huge financial mistakes that I’m still recovering from. The following are where I went wrong and how I’m moving forward:
1. Not making payments during your 6-month student loan grace period
Recovery: Make weekly payments
While this is fantastic for those who use post-grad months to find employment, it gives a false sense of security for people who did land a job after graduation … and then think they have a 6-month free pass without making any debt repayments.
Newsflash: Interest still accrues each month regardless of employment status. In order to ensure that your money goes to paying off the principle, divide what you would normally pay on your loan each month by four, and then pay that smaller amount each week.
2. Not creating a budget
Recovery: Observe your spending habits, then start!
To begin, track every purchase you make each month. Use an app, write it down as you go or look through your debit or credit card statements regularly.
Observe how much you spend on fixed expenses (rent, utilities, groceries, etc.) and how much on non-necessities (restaurants, entertainment, accessories, etc.) After that, calculate what 30% of your income is, and if the amount for non-necessities is over 30%, see which areas you spend the most on and try to cut it down.
At the end, you should have a budget that allows 50% of your income for fixed expenses, 20% for reaching your financial goals (like debt repayments) and 30% for flexible spending.
3. Relying heavily on a credit card
Recovery: Use sparingly, and pay off in full
While credit cards can be a useful tool to build up your credit score, if you only pay the minimum each month, they give the illusion that you have more money than you actually do, which is harmful when creating an accurate budget.
In order to avoid racking up credit card debt, it’s best to either pay it off in full each month or keep a low running balance (something easily payable, like around $10).
4. Making high debt payments each month
Recovery: Keep debt repayment proportional to your income
I know, this seems nonsensical. If you have a lot of debt, isn’t the right thing to throw as much money at it as possible? Well, yes and no.
Yes, you should make your high-interest debt a priority, but you shouldn’t use so much of your income that you don’t have enough money left over each month to pay your other fixed expenses. There’s nothing worse than feeling happy you paid triple the required loan payment amount only to realize you have an overdue doctor’s bill that you don’t have enough money to cover.
If you can afford to make extravagant debt payments, go for it, but if your salary isn’t very high, try to keep your payments limited to around 20% of your take-home pay.
5. Overspending to furnish your “adult” life
Recovery: Always check free resources first!
My friend “invested” in a set of fancy leather couches but has no idea where he’ll settle down permanently, so until he figures that out he’s forced to hire a truck big enough to transport his two couches each time he moves.
While I love shopping, I’ve purged enough of my stuff that when I move into my next apartment — it’s tiny, the rent is affordable and it’s in a prime city location — I’ll take only one or two suitcases to fit all my clothes and put my futon mattress in the back of a friend’s car. I’m not weighed down by much, and wherever I move next I can furnish it with whatever I find for free or extremely cheap.
If you want to commit to reaching financial milestones while also having the freedom to travel and apartment-hunt wherever you please, opt to use free or heavily discounted resources whenever possible. Craigslist’s free section, college students’ moving sales, sidewalk sales and Goodwill are all fantastic options.