A good friend of mine posed me the question if I had some advice for all the graduating students this month. An interesting question given that I did not face the same issues and questions students in the United States face today.
Before I continue: CONGRATULATIONS for those that already graduated this month and to those who soon will!!
Back to why I didn’t face the same issues you do. I graduated in the Netherlands some time ago when student loans did not exist. That combined with a tuition which at the time didn’t exceed $1,200 there was no financial burden for me (or my parents) AT ALL.
I had not debt, my tuition at the time was practically free, I had a government scholarship like EVERY other fellow student and I got to use public transportation for free. I did not face an uncertain future as some of today’s students do. I certainly did not face the multitude of financial pitfalls today’s graduates do.
The good news is that is that the job market is getting better. My former employer last year started looking at the talented pool of college graduates, for the first time in the 14 year I worked there, which give me hope for the new generation of graduates.
From a financial perspective (which is what this blog is all about after all) I have a few words of advice.
As you graduate, one of the first things you’ll probably do is start your own life, and with that I mean separate from your family (move out of the basement if you haven’t already) and away from your college roommates. You’ve probably been on your own for a while, while in college, but that is not the same as post college “real” life (don’t give up on the idea of roommates necessarily).
You’ll hopefully be getting a job; you may relocate and get your own apartment; you may move in with your partner, who knows? Real life starts now and with real life comes with real cost. You’ll be paying rent, you’ll have to start paying for utilities, you’ll need to buy furniture, mom probably will no longer do your laundry, you’ll need to get insurance and your dinged up 12 year old Subaru Outback may not be suited for your new employer’s parking lot.
The good news is, as expensive as it may seem to you; it’s not. You can still keep it cheap. Even though you maybe psyched about the fact that you now make five figures (or who knows maybe even more) it doesn’t mean you should spend it all. Don’t go out and buy that Lexus. Sure, get rid of the 12 year old Outback but see if you can a 2 year old used one instead. Don’t rent the biggest apartment your salary can afford, start small for now and learn to live with it.
It is easier to start living below your means and adjust from there than it is to have to downsize after it’s too late.
Even if you are financially able to (and don’t believe what the banks tell you what is affordable) I would hold off on buying a house. You’re young and should try to stay mobile for a while. You may have landed yourself a job but one year from now you might realize you want to try something else somewhere else. Renting will make that a little easier. Buy a house when you’re ready to settle down (and can afford it).
Here are some practical tips:
Watch out for those credit cards
As a graduating student you probably (and unfortunately) already used to some debt in the form of student loans but, PLEASE do not make this worse by also accumulating credit card debt! The temptation will be there since credit card companies will drown you in the 0% APR offers. Don’t get suckered in, your 0% APR will very likely jump 21% or higher when you least expect it. If you already have credit card debt your first task will be to get rid of that and change your spending habits.
Sadly you’re in a bit of a catch 21 situation where on the one hand
you will need a credit card may be the easiest way to establish credit (and a FICO score)* but on the other hand you really shouldn’t be using one. You really should stay away from credit card debt. If you use it make sure that what you’re paying for can be paid off prior or at the time the credit card bill is due. Try not to rollover credit from one month to the next.
I realize it is tempting to max out that card but it will not end well. If you thought being at the mercy of your professors was bad, wait till you’re at the mercy of the credit card companies.
The best head start in life is to stay clear of credit card debt.
Pay yourself first
If you are one of the lucky ones to land a job that offers a 401(k) make sure you contribute. Contribute what you can and contribute at least as much as needed to get your employer matching. I realize that retirement is not on your mind yet but boy will it pay if you start now. Also if you’ve managed to get out of debt or were lucky enough to start without, save some money. You can keep it in the bank but I would strongly encourage you to take up on the next point:
For the really lucky ones among you: If you land that job and manage to have some money left at the end of the month (that is after you’ve paid of your Student loan debt) start investing. Nothing complicated, just buy some SPY. $300 a month starting at age 25 will get you over a million by the time you retire. I explain the numbers in detail in my post on compounding.
If you get married try to do so in moderation
For most of you this is far from what you’re thinking of, but some of you have been anxiously awaiting that diploma so you can finally marry your college (or high school) sweet heart. I’m not going to make a judgement call on whether that is good or bad, I know people who’ve done it and have been happily married for over 25 years. What I will make judgement on is that massive diamond you are “expected” to buy and the $30,000 wedding. DON’T showing your love for each other should not come in the form of “Look how much we were willing to spend to prove it”. Buy your fiancée a modest ring, she won’t love you any less (and if she does think hard about what you’re getting into). A small wedding with your close family and closest friends will leave you with much better memories than the $200 a plate, 120 guest spectacle in which probably a whole lot can go wrong.
Last piece of advice: Follow your dreams; do not chase the proverbial pot of gold. Money will not make you happy. Family, friends and happiness are what matters. Trust me, money won’t get you any of those.
Correction: Greg Fisher at creditscoring.com has pointed out that credit cards are not the only way to establish a credit report.
Congratulations and good luck to turning your goals into reality!!