5/3/2013 8:15 PM ET|
8 moves for college seniors
An army of new graduates is about to hit the streets, and many will be managing finances for the first time. Here's how they can prepare.
Every summer, hordes of freshly minted college graduates are released into the real world. Many will be woefully unprepared for the credit and money demands of life off campus.
If you're among this group of college seniors but financial newbies, prepare to rise above the unready fray. Here are the most crucial money steps college seniors need to take before tossing their caps into the air. Don't worry, though: Each is easier than organic chemistry.
No. 1: Confront -- and maybe change -- your student loan payments. Avoid sticker shock by calling or logging on to your loan servicer and seeing how much your monthly payments will be. For federally guaranteed loans, you'll automatically be placed on the 10-year repayment plan, which could mean high payments. If managing that payment seems unlikely, you can request an alternative arrangement. "You may opt for the extended repayment plan, which is 25 years and has a lower monthly payment," says Scott Gamm, founder of HelpSaveMyDollars.com, a website that helps students and their families learn about money. Know, however, that the longer you stretch the payments out, the more interest will be added to what you owe.
No. 2: Pull your credit report and scores. In a few short months, landlords, employers, banks and insurance companies probably will start checking your credit reports to learn how financially responsible you've been. Your reports, therefore, need to be perfect. To prevent being denied opportunities due to errors, download your reports for free once a year from each of the big three credit bureaus -- Experian, Equifax and Transunion -- from AnnualCreditReport.com, Gamm says. Your student loans will be listed, as well as evidence of any other borrowing and repayment activity. If you spot any mistakes, use the credit bureaus' error dispute process to clean them up.
No. 3: Pay bills early. Elisabeth Donati, president of Creative Wealth International of Santa Barbara, Calif., a company that educates children and young adults about personal economics, recommends that final-year college students should establish a habit: sending bill payments the day they arrive, rather than waiting for the due date. "It's a great psychological place to come from when you're working at creating financial freedom for yourself in the future," Donati says.
No. 4: Possess your own plastic. Mom and dad may have made you an authorized user on their credit card account or even co-signed a card for you, but the time has come for you to have your own. Because an unsecured credit card may be out of reach, go for one that's secured instead. They're easy to qualify for, since you put down a nominal cash deposit as collateral. Once you have the card, Gamm says, "Use it for small purchases and always pay on time. Within as little as six months, you'll already have a credit history developed." Once you begin to create your own credit history, you can choose to remove yourself as an authorized user on your parents' cards. Or, if your parents co-signed on a card for you, call the issuer and see if it will allow you to open a new card account in your name only and cancel the co-signed card.
No. 5: Charge ahead, not behind. Once you have your plastic, you should use it -- but pay in full. Always keep this rule in mind, Donati says: If you can't afford it in cash, you can't afford it. Living in arrears is a depressing and expensive experience. "If you really want something, do your current and future self a favor.; save up for it until you can pay cash for it. Not only will you not go into debt purchasing the item, you'll have the bargaining power of cash and can probably save yourself some money in the process."
No. 6: Save, under any circumstances. Yes, even if you are living close the edge, try to set a little aside for the day you leave campus for good. "The transition from college to the 'real world' can be expensive," Gamm says. "You'll need money for an apartment deposit, utilities or possibly a moving truck. If you start saving now, you'll have a nice cushion, and you'll be able to avoid going into debt to cover them." A mere $500 can help ease the pain, but more is better.
No. 7: Prepare a projected budget. Chances are that as a college senior, you're already accustomed to stretching packets of ramen noodles so you can meet all your current expenses, but also consider what you'll require later on. Research the rental rates in the area you want to live in, then estimate other necessary expenses. "You'll need to cover your four walls: food, shelter and utilities, transportation and clothing," says Rachel Cruze, speaker and daughter of financial expert Dave Ramsey, who travels the country speaking to college students about money. The first three will be the most vital, but such items as interview clothes and a warm winter coat are also important. Subtract their total from an estimated income for the job you think you might get to see how you can make it work.
No. 8: Accept tomorrow's reality today. As you're developing your upcoming budget, you'll probably discover that the post-campus glamorous life that you've envisioned will have to be put on hold. Get accustomed to that idea. "Most seniors start thinking about all of the purchases they're going to make after college -- the new car, the new furniture, the new house," Cruze says. "But remember, you're 22, not 52. You don't need the latest and greatest, and let's face it, you probably can't afford it yet."
Finally, keep in mind that most people make money blunders in the beginning and continue to falter later. The occasional bill will slip behind a dresser, and you'll pay it late. You might overswipe that credit card, then owe a painful sum. Aim to learn from every oops. As the saying goes, your schooling may be over, but your education continues.
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When you start that first job, and if you have not already done so, make it a habit to do the following right from the start:
1. Save an emergency fund - leave it liquid and leave it alone - it is for emergencies
ALWAYS keep yourself and your property insured. Health, property and disability
2. Once you have the emergency fund in place, contribute a material amount to your retirement, 10% of your gross, The younger you are when you start, the less it has to hurt - compounding alone is your advantage
3. For every raise, put half of that raise toward an increased retirement contribution percentage
4. Watch account fees closely, do not take contribution holidays and for goodness sakes don't take a loan.
Consider items 1-4 a regular bill - it is not discretionary income. Any income after taxes and the items above is 'take home'.
5. Start saving an already taxed amount as you can - put that into good investments
6. Ride out downturns and stay steady (do not panic sell) - enjoy contributing while the market is on sale
Somewhere in there, trade rent for a mortgage - do plan to pay it off well before you retire
Fast forward through life (it ends up going faster and faster, believe me) and replace worry about retirement with a pure enjoyment of your retirement years. Your senior-self will thank you for your effort!
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