3 Common Financial Mistakes New Grads Make
- Failing to budget makes it easy to overspend and hard to save.
- Split windfalls between savings and spending.
- Establish a saving habit even if you only put away $5 a week
You’re a new grad – congratulations! You officially “know things” and you’re ready for the next chapter of your life. But graduation from high school or even college doesn’t mean you understand money. It’s not your fault – according to the Council for Economic Education, fewer than half of US states require basic financial education for students. Even doctors who spend years in school are notoriously bad with money, according to at least one recent study.
The good news is that you are young and can avoid these three common money mistakes by establishing good financial habits today.
Mistake #1: Failing to Budget
Budgeting – we all know we should do it, but only 30% of adults actually create financial plans, according to polling company Gallup. So it’s not surprising that about 40% have less than $300 in savings and that the average credit card debt is over $6,000 per person.
Why don’t we budget? Because it’s not fun. People think of budgets as buzz-killing wallet police out to suck the joy from our lives. But that’s not right at all. Budgeting is really an exercise in prioritizing. In other words, a well-planned budget makes sure that you have more money available for the things that matter most to you by cutting back on things that matter less.
Getting it Right
There are many ways to budget, and one method is bound to resonate with you. Here are common tools:
Apps that you synch with your bank accounts
Spreadsheets (there are many examples online that you can copy)
The right tool for you is the one you’ll actually use. You can always upgrade when your finances become more complicated. Right now, the most important thing is establishing a healthy habit for life.
Mistake #2: Blowing Extra Money
If your first thought when you come into extra money is throwing a party, extreme retail therapy, or a wild weekend, you need to slow your roll. Impulse spending is by definition unnecessary. If you mindlessly blow your entire windfall on impulse purchases, you don’t make any long-term gains. Your friends will be on to the next party while you’re still cleaning up the beer spills, your shiny new purchases will begin collecting dust, and your weekend memories will fade.
Don’t squander your luck. When you hit a rough patch, you’ll wish you’d dialed your spending back a little when you had the chance.
Does this mean you have to bow to your budget in all things and have no fun whatsoever? Of course, it doesn’t.
Getting it Right
If you win at blackjack, get a bonus at work or make a ton on eBay, claim half of the money for fun. Then, put the rest toward a financial goal like paying down debt or adding to savings. When the thrill is gone from your impulse purchases, you’ll still have money to make your life richer in the future.
Mistake #3: Not Saving Consistently
You’ve probably heard or read that it takes about three weeks of daily practice to establish a new habit or break an old one. So of course you won’t save consistently if you only deposit what’s left in your wallet after payday rolls around – because how often does that happen?
Failing to save consistently means that years will sneak by and you’ll find yourself wanting to buy a home, needing a new car, or hankering to start a family or a business – and there’s no money for it. Without savings, you’ll be vulnerable to debt problems when you can only solve emergencies by borrowing. On the other hand, creating a savings habit allows your future self to jump at opportunities and enjoy more security.
Getting it Right
There are many ways to start saving. If you don’t have an emergency fund, $1,000 is a great starting point. Even if you can only afford to save $5 a week, start there. It’s more important to create a good habit at this point than it is to save a ton with lightning speed.
Decide where the money you plan to save will come from – eating one more meal at home each week? Cutting a little-used streaming service? Getting your hair cut every six weeks instead of every five? Show yourself the money!
Next, open a dedicated savings account for your emergency fund. Checking accounts are terrible savings devices because they are too easy to raid. A savings account without ATM access is ideal.
Jumpstart your savings and make yourself extra motivated by finding hidden cash – sell things you don’t need, deposit your tax refund, sign up for an extra shift at work, whatever.
Finally, let the depositing begin. The easiest way to save is to have your employer split your check between your savings and checking accounts. Automatic deposits take the temptation to spend away when you’re feeling flush. Or you can set up an automatic transfer from checking to savings with your bank a couple of times each month.
Once you have headed off these common mistakes, keep up the good work. Budget for long-term goals like retirement (and take advantage of company 401(k) accounts and matching benefits if you have them). And budget for shorter-term goals like vacations, weddings, and buying a home.
Talk to a financial advisor about the best kind of investment for each goal. Brokerages like Schwab, Amerisave, and others offer free or low-cost robo-investing accounts that do a good job of putting you into the right accounts for your situation and goals.
Life will probably get more complicated in the years following graduation. But by establishing some basic good habits today, you’ll stay on top of your money and enjoy a better financial future.