If you just graduated from college in the past year or two you’re probably now enjoying a new freedom. You’re free from having to pull those dreaded all-nighters to prep for those mid-terms and freedom from the ongoing, daily grind to keep up your GPA. Unfortunately, whether you realize it or not, you’ve graduated into something that isn’t as free as you might have thought. You must now face the ugly reality of rent checks, utility bills, car payments and repaying your student loans.
Freedom isn’t free
You might remember that old song by Team America that freedom isn’t free. While it had to do with fighting for freedom the same thing could be said about your life now. You might be free from college but your new freedom isn’t free. You’ll now have bills to pay, which might mean you’re going to have to learn to forgo some of those luxuries that you never imagined having to give up like that gym membership, those weekend trips to see your college buddies, or frequent dinners out with friends. In fact, if you try to continue enjoying these things you could end up with a mountain of debt that would take you years to eliminate. So, the first thing you need to do is stop thinking you can afford those luxuries and start thinking in terms of your new reality.
Start a budget
Just about the worst thing you can do at this point in your life is not have a budget. Without a budget you’ll have no idea where your money is going until, well, you don’t have any left. You need to make a budget to allocate money for your car payments, rent, loan payments, social activities and food. This means tracking your spending for at least a month and then dividing it into logical categories. Set a spending limit on each of those categories and then do everything you can to stick to them.
Recognize what you can and can’t have
Be realistic about what things you can afford that you’re used to having and those that you can’t. Make realistic decisions and be okay with them. Keep in mind that everyone in your age group is in the same fix as you’re in and will also want to save money. Don’t be afraid to discuss finances with your friends. You might all learn something from each other.
Start an emergency fund
There are two things you can count on in life. First, things will change as change is the one constant. Second, you will have an emergency of some kind in the next year or two. It might be a serious illness, a terrible automobile accident or because you lost your job. If you don’t have an emergency savings account and run into an emergency it will mean using a credit card to pay for it, which means creating new debt. While experts say you should have the equivalent of six months of your living expenses in your emergency fund that might seem a bit daunting. So try for at least three months worth.
Sign up for a 401(k) or another company-sponsored savings plan.
If your company has a 401(k) and will match some percentage of your contributions, run do not walk to sign up. That’s free money. If your company doesn’t have a 401(k it might offer a traditional IRA or Roth IRA. If you’re not familiar with the difference between these two it’s an issue of taxes. The money you put into a traditional IRA is pretax money meaning that you don’t pay taxes on it until you begin withdrawing the money. In comparison, you pay taxes on the money you put into a Roth IRA but it’s tax-free when you begin withdrawing it.
If your employer doesn’t offer any kind of a savings plan, you can create one yourself at a local brokerage. Whether you choose a conventional or Roth IRA the easiest way to fund it is by having the money automatically withdrawn from your paycheck and transferred to your brokerage account. It’s just harder to miss money than you’ve never seen vs. having to pull it out of your checking account and transfer it to your IRA. And, yes, it may feel a bit weird to be saving money you won’t see for maybe 40 years but trust us when we say your future self will thank you for it.
Get some financial tools
There are a raft of free financial tools available that could help you get and stay organized. Two of the most popular of these are Mint and Mint Bills. These tools will help you create a budget, control your spending and both see and pay all your bills in one place. This could help you create healthy financial habits before you can start making unhealthy ones.