As glamorous as Macklemore makes it sound, popping some tags with only 20 dollars in your pocket probably isn't a financial situation you ever want to be in. Being a billionaire, buying all of the things you never had and smiling next to Oprah and the Queen on the cover of Forbes magazine is more like it. While we can't promise that you'll become the next billionaire after reading this article, we can make sure that you're headed in the right direction and getting into good money-managementhabits so you can handle your finances after graduation with no problem. Check out these six things you should know about money by the time you graduate!
1. Budgeting is key
Trust us, budgeting is definitely not overrated. In fact, it's the best way to manage your finances, hands down. You can start practicing budgeting right now while you're still in college. Basically, budgeting is creating a plan to spend your money. It ensures that you'll have enough money for things that you need and keeps you away from debt.
"Don't let others budget for you—only you know what your personal necessities are," says Reyna Gobel, author of CliffsNotes Graduation Debt. "For instance, I need my lattes and budget for them. Someone else may budget for magazines or expensive makeup. Your needs are not subject to anyone else's opinion as long as you can pay for them."
In order to budget your money effectively, always balance your expenses with your income. Write down monthly income sources, including parental allowances and wages, and your estimated expenses for the month, including food and personal-care items.
And as much as you don't want to think about your loans, you can't pretend like they don't exist when you're allocating your budget.Student loanswill likely be a burden to you and your bank account for years after you graduate, so make sure to factor paying off loans into your monthly budget, says Beverly Harzog, credit-card expert and author of Confessions of a Credit Junkie.
"Your loan is an investment in your future, so try to think of that as a good type of debt,” Harzog says.
Gobel suggests putting off picking a student-loan-repayment plan until after you've been out of school for at least two or three months. That way, you'll have had time to try out different amounts of loan repayment with your monthly budget and figure out what payment size you can actually handle. You don't want to repay so much that you feel like you don't have enough money left for your other expenses, but you also want to pay off those debts as soon as possible to avoid crazy interest rates. Try to find a balance between the two. After two or three months have passed, have in mind an appropriate monthly amount for loan repayment and then choose the repayment plan you know you can handle.
A lot of great budgeting apps are literally right at your fingertips. The iPhone app iReconcile comes with a budget tracker tool that allows you to set up daily, weekly, monthly and yearly budgets. MoneyWiz and Level Moneyare also apps than allow you to create custom budgets. By sticking to your own personalized plan, you'll be on your way to successfully managing your own budget.
2. Spend less than you earn
It's a simple matter of mathematics, or so it seems. Spending less than you earn is, surprisingly, a lot easier said than done.
"It's really important that graduates embrace the idea of spending less than you earn," Harzog says. "This simple rule will help you stay out of debt. But to practice this rule, you also need to have a budget in place and track spending."
One way to make sure you're spending less than you earn is to automatically put a certain amount of your income into your savings account every month and not touch it. That way, the money that you put away is out of your reach and you won't be tempted to use it. The rest of your paycheck can then be budgeted and spent accordingly, but it's nice to know that you'll always have an emergency stash of money in the bank that will hopefully just keep growing and growing, but can also be taken out in case of emergencies (and no, a really great sale at the mall is not an emergency).
3. Track your spending
Little purchases can certainly add up as much as big purchases. Those extra lattes every morning or the occasional splurges on makeup that seem to happen on every shopping trip have a way of making a dent in your bank account, don't they? They're sneaky, but you can be sneakier! By tracking your spending and making sure to budget for the extra expenditures you know you can't resist, you'll be able to fend off any surprise hits to the bank account courtesy of these little purchases.
"I never got into trouble in college from buying big items—it was always a cumulative effect of small items that eventually added up to hundreds," Gobel says. "Thus, it's important that college students stick to a budget but all also treat it like it's a living organism. In other words, budgets change as your needs, wants and financial understanding changes."
Get into the habit of tracking your spending regularly, like once a day or once a week. Maybe you like taking a few minutes before you go to sleep every night to go through your receipts and track your spending. Or maybe you like to give yourself a chunk of time one day a week to get your records all up to date. See what works for you and make a commitment to stick to it, leaving yourself reminders if you need to.
To help track spending, Harzog suggests using free online money management software or a smartphone app. "It's helpful to see how much you spent and where you spent it," she says. "You also need to know how close you are to your budget for a category." For example, if your clothing budget is $100 per month and you've already spent $97 this month, you should think twice about taking another weekend trip to the mall.
Harzog herself, along with her children, uses the online personal finance management tool Mint. Other popular tools include Quicken and AceMoney, although both cost money and require you to install them on your computer. Harzog recommends Mint for people who are more visually inclined because you can see your budget in pie charts and graphs. Plus, it's free and doesn't require installation. By choosing software that works with your style, you'll be able to easily create and stick to your budget and track your expenses.
4. Use—don’t abuse—credit cards
Those banks keep sending you persuasive mail about the latest credit cards that you have to have, and those shiny, beautiful, magical cards keep calling your name! No more cash? A swipe here. Not a lot of money left in the bank? Another swipe there. And while college is a great time to start building credit, it's also easy to get carried away and incur a huge amount of debt because, well, credit cards are just so easy to use. Sometimes it's easy to forget that you have to pay all that money back eventually, plus interest if you’re late.
"One of the biggest mistakes is not tracking your spending on a credit card and then having to carry the balance for a few months, or worse, longer," Harzog says. "Don't use credit cards unless you're sure you will pay the bill in full by the due date. Paying interest expense is a terrible waste of your hard-earned money."
While it's important to start building a good credit history early, don't risk overextending. Make sure not to use credit cards unless you know you’re sticking to your budget and won't overspend. When you're about to buy something, ask yourself if you really need it. Thinking before you buy is so clichéd, but it works! Weigh the benefits of purchasing something now with waiting a little longer when you have some spare cash.
Speaking of cash, try not to use your credit card when you can use some bills instead, especially when you're making small purchases like snacks, groceries and restaurant bills. In fact, if you can, keep your credit cards in a safe place at home instead of in your purse 24/7; you'll find yourself saying "put it on the card" a lot less.
5. Pay on time and build good credit
When you gotta pay your bills, you gotta pay your bills. And on time, too. Such is the life of an adult. Otherwise, you'll waste money on late fees and your credit score will just keep dropping.
Credit score, you say? Pshh, big deal. But while your credit score seems like an innocent enough three-digit number, it's actually calculated from your credit report and used by lenders to determine your creditworthiness for everything from a car loan to an apartment rental, and it can affect the interest rate you're charged. It can also mean the difference between being denied or approved for credit.
"One of the most important things is to always pay your bills on time—all of them," Harzog says. "Even a late cell phone bill can get reported to the credit bureaus, and this can make your credit score drop like a rock. Having an excellent credit score will actually help you save money in many areas of your life, including health insurance, car loans, car insurance and more."
To help you pay your bills on time, try signing up for online bill pay if your bank offers it to save time and postage. With bill pay, you can actually tell the bank how much money you want to pay, to whom and when you want it taken out of your bank account. The bank then sends the money to the payee for you, just like that. You can also set up text or email reminders from banks and via budgeting software like Mint about due dates. Auto-pay is also an option, but try to avoid it if you have issues with cash flow, since you need enough cash in your account to cover an automatic payment.
6. Set financial goals and plan ahead
Have your eye on a new laptop? Want to save up for a vacation with your besties? Whether you're thinking big or small, it's never too early to start setting up financial goals for yourself.
"Having some goals will actually help you stick to your budget, and I'm not just talking about saving for retirement, though that's obviously important, but think about other big items, like buying a house someday," Harzog says. "And you can also have goals for fun things, too. If you want to take a vacation next year, save for that now so you can take the trip without going into debt."
In addition to striving for these long-term goals, it can also be useful to think ahead on a month-by-month basis. Especially if your income varies, like if you have tip income, always try to think at least one month ahead. "You don't want to be short on rent because tips were lower one month than another," Gobel says. "To incorporate this idea, stash any money beyond your average monthly tip amount in your checking account." This way you'll be okay the following month, even if tips are lower. Who knows, maybe you'll even have some money left over to save up for that new laptop or vacation!
Entering the real world as a new grad can be intimidating. On top of everything else, you'll have to manage your very own finances and bank accounts. Luckily, you're now armed with the basics of good money management and ready to put them to use!
Make a vow to yourself to follow the rules. "For instance, if you want to check your budget and your spending every day to make sure you're on track, then make a vow to do that," Harzog says. "Choose a time that works into your schedule easily so you don't just blow it off. Over time, good money habits, such as tracking expenses and paying bills on time, will become a part of who you are." You'll be managing your finances like a pro in no time!