Too much financial advice is about pulling yourself out of trouble.
I am glad it exists. People in a money hole need a way out. But wouldn’t you like to skip the dig and get straight to living your life together?
Your early 20s is an important place in which to build a financial foundation. You can quickly undermine your financial health with unmanageable debt and spending, or you can build a solid safety net and plan to help you get through this transition period and get out on the other side on a solid footing.
Note: choose the latter.
Here are five things you should know about your money as you leave college in preparation for a solid financial future.
5 things you should know about your money after college
Now is the time to find out the answers to these questions as you prepare for financial success for years to come.
1. What is your credit score?
That sounds like a terribly boring starting point, but it’s the key to a solid financial plan. Understand your credit history and that Factors That Make Up Your Credit Score Provide a solid financial picture to build from.
You can get one free credit report directly from a credit bureau, but that doesn’t include your score. Instead, I recommend a tool that will show you your creditworthiness and the elements of your creditworthiness that affect it.
With these tools, you can see, among other things:
- Your FICO Score or VantageScore. Each of these Types of Credit Scores can be useful. However, they are different. So make sure you know which ones you are looking at and how they compare to the creditors and lenders.
- A breakdown of your debt. All credit cards, auto loans, personal loans, and student loans on your behalf are displayed, including the amount of your debt and the company you owe them to.
- Payment history. You will see if you have any negative grades outstanding, e.g. B. Unpaid bills. You can use this information to pay them off and clean up your balance, or if they are old, wait for them to do it fall off after seven years.
One word of caution: these tools make money by recommending products like loans and credit cards. Their referrals can be helpful in saving money and boosting your bankroll – but make a plan and start browsing first. You may find better options yourself.
You could learn that you have no credit scorewhich is also useful information. This means that you haven’t borrowed or used credit cards long enough to keep a credit history.
If so, do any of the following to start building credit:
- Become an authorized user on someone else’s credit card – like your parents or another family member.
- Open a secured credit card with a deposit and a low credit limit.
- Take out a credit builder loan.
- Open a business credit card – but don’t use it too often.
- Use the store to finance a large purchase such as furniture or appliances.
- Use a co-signer for a credit card or small loan.
- Use a service that reports your rental payments to credit bureaus.
Trade now: Check your credit score and report details for free with a tool like Credit Karma or Credit Sesame.
2. How do you make a budget?
This is so basic that you might overlook it: you need to know how much you spend each month and how much you make.
Creating and following a budget can be especially difficult during a transition period; B. when you start a new job or move. Immediately after college, you may not have a stable monthly income, and much of the budgeting advice probably doesn’t seem to apply to you.
But you should figure out how to budget it to work for they.
My favorite is envelope budgeting because it allows you to plan your necessary expenses, repay debts, and savings, and then do whatever you want with the leftovers. So you don’t need to keep a detailed log of every burrito you buy.
You can use actual paper envelopes if you have a lot of actual paper money to deal with – or you can budget for digital envelopes using an app or bank account that includes the feature, such as: Capital or Qube.
Or, you can just create a spreadsheet budget and set a weekly money date for yourself (and your partner, family, or roommate) to keep track of expenses and income and create a plan for the following week.
However you prefer, a budget should help you see in one place:
- Income. If you have a fixed salary, you can plan your monthly after-tax takeaway salary in advance. If you have irregular income and you have a budget to keep track of, you can find a three- or twelve-month average that you can use to plan ahead.
- Costs. By tracking your recurring expenses like housing, bills, and groceries, you can see how the amount compares to your income and you can find places to cut back. For example, your housing should cost no more than 30% of your income, and there are myriad ways to do it Keep your utility bills low.
- Expenditure. Typical budgeting apps show you this: Where your money is going every day. These are your day-to-day transactions such as eating out, shopping, or entertaining. At least track this when you first start budgeting to spot trends and places to cut down if money is tight.
- Fault. Minimal credit and credit card payments fall into your expenses as these are necessary monthly bills. Adding debt-specific categories gives you a productive place to cash in extra cash each month so you can pay off your debt faster.
- Savings. Don’t Forget To Save Money After College! When you see savings on your income and expenses, finding space each month to put a little aside is easy.
Trade now: Create a simple spreadsheet or download one Budgeting app to keep track of your money.
3. How are you going to pay off debts?
By checking your credit history and report details, you can see how much debt you are dealing with and who you owe money to.
That means you can make a plan.
Your plan will depend on how much debt you have and how much extra money you have to work with each month. So there isn’t the best plan for everyone, and your plan can change if your income changes.
The Debt snowball method is a smart plan if you have multiple accounts to withdraw with limited income. It removes the debt settlement overwhelm by allowing you to focus on one debt at a time, how much money you can afford to allocate.
If you have a federal student loan debt, look into yours Repayment options. By default, you’ve signed up for a standard 10-year repayment plan. This can make monthly payments difficult to manage. An income-based repayment plan could help.
Personal debt, and even credit cards, may have more repayment flexibility than you think. You may be able to:
- Refinancing private student loans get a lower interest rate.
- Ask for a grace period or grace due to economic difficulties.
- Register for bankruptcy wipe out most of your debts.
- Negotiate a payout amount, especially for debt in collections.
- Negotiate a payment plan that will make it easier for you to keep up with.
Trade now: Prioritize your outstanding debt in any way that makes sense to you – based on interest rates or balances. Use your monthly budget to see how the repayment fits.
4. What is your long term savings plan?
You’re probably just starting out on the workforce, I’m sorry to bring this up, but … retired.
I know: OK boomer. It is far away. It does not matter. You will likely work forever.
I’m not asking you to choose your Florida Keys apartment. Just add one retirement provision Bucket to your budget, and thank your wise young self later.
Here’s why: the sooner you start saving for retirement, the easier it is – and the more you can get for free. Retirement accounts are invested in the stock market, with the interest earned flowing back into the account to earn more interest – i.e. H. compound interest.
Because of compound interest, all you have to do is save a little each month if you start now, and it will likely become quite a lot when you retire … or start your third act, or whatever knowledge workers in their 60s are doing.
Trade now: Set up paycheck contributions if your employer offers a 401 (k). If not, set one up IRA on your own and contribute to it something. As a rule of thumb, you’ll save 10% to 20% of your income for retirement, but save less if it’s all you can afford – it will pay off in interest later.
5. Do you have an emergency fund?
One of the best things you can do for your financial health and safety – even if you are on a tight budget – is to create one Emergency fund.
When money is tight it can be difficult to put something aside for a rainy day, but aren’t you glad you did? (I’ve been there and the answer is definitely YES.)
Don’t be intimidated by recommendations that an emergency fund must cover six months of salary. If I were you, that would keep me from starting one in the first place.
Instead, just set aside as much money as you can.
A few hundred or a few thousand dollars might not pay your rent for six months, but it could keep your budget intact if you get an unexpected utility bill. These little moments can affect or affect your financial health. So find little ways to always be prepared.
Savings apps can help you save money without even realizing it – by subtracting a little from each paycheck, rounding up purchases to keep the “digital shift” in place, or withdrawing money from your bank account.
Once you have an emergency fund that you are comfortable with, you can start saving for other short-term goals as well.
You might want to pay a down payment for a car or house, go on vacation, get married, or upgrade your living room furniture. Whatever it is, saving in small increments will help you spread the expenses out over several months so that you don’t feel like your budget is burdened all at once.
Trade now: Add an envelope or bucket to your budget and put money in regularly.
Build a solid financial foundation
As you move into adulthood, take on new jobs, and move to new cities, you will be bombarded with advice on how to optimize your finances – if you invest, the credit card rewards it.
That advice is fine, but you need a solid foundation first.
Quiet the noise and make sure these five pillars are in place to stabilize your finances before playing with crypto and travel points.
Dana Sitar (@danasitar) has been writing and editing on personal finance, careers, and digital media since 2011.
This article originally appeared on www.thepennyhoarder.com