We’d like to share “Financial Tips For College Graduates” by Angelyn Wright of the Wright Law Alliance. She is a bankruptcy lawyer in Decatur, Georgia with over 25 years of experience. Her goal for this post is to add some insight for college graduates entering the next phase of their lives.
You’re in the home stretch of your senior year and the next chapter of your life is about to begin, congratulations! We’d like to share with you some financial tips since you are on your way to being a college graduate.
Finals can be stressful but you’ll get through them, next thing you know it’s graduation time. We know, if only it were that easy.
If you’re like many young adults, college graduation is the first time you’re expected to make smart financial decisions and deal with mistakes that happen. Adulting is a thing… your thing. Even the most seasoned money veterans make investment mistakes, need financial advisers, and have to figure out how to right their financial wrongs. Rest assured, mistakes will happen. Learn from them and be better.
We know it can feel overwhelming when you’re learning how to navigate credit, paying off your student loan debt, getting your first job, and working on building savings. In college, you have a bit of a safety net, but once you graduate, it disappears. Any person can feel this pressure and quickly get overwhelmed, but we are here to encourage you. We want to break down smart money moves, educate you on common mistakes, and ensure you have a path forward when those mistakes happen. When it comes to money, sometimes smart, basic moves are the best. Though it can be tough to know what simple is when navigating the financial systems of the United States.
Repaying Student Loans
It’s no secrete, college can be expensive. There’s no shame if you took out student loans to pay for your education. In fact, student loans can be an effective way to start building your credit, but it’s important to be smart with your loan repayment commitments. According to the Institute for College Access and Success, two of every three college students takes out loans to pay for their education, so if you’re in the same boat, you’re actually with the majority. Here are a few tips on how to pay back your loans:
Understand the repayment plan.
Once you graduate, you’ll have about 6 months before you’re required to start making payments on your student loans. It’s important to review your loans before this to set up a repayment plan and get a grasp of what your monthly amounts will look like.
Set your monthly payment as high as you can.
When you do start making payments, increasing your monthly payment by just a few dollars can save you thousands in the long run! Setting up a recurring payment with your loan provider will ensure you never miss a payment.
If you’re not making enough money to pay the monthly amount required, work with your loan provider.
There are certain instances where the loan provider can set up a lower monthly payment for you based on your income. If that’s still not feasible, you can explore deferment or forbearance with your loan provider. Watch out though, these options can negatively impact your credit.
Take Credit for Building Credit
Credit often feels so complex to those new to being fully financially independent. It seems counterintuitive that a credit score is important, so you have to build some credit, but you don’t want too much credit, or it will have a negative impact on your credit score. It’s this very fine line every adult has to walk. Consider these smart credit-card moves:
- Get a low-interest card as your first. It might sound exciting to get travel rewards or cashback, but typically the basic cards with low interest rates are the way to go. Each month, you get a bill for what you spent on your card, and the amount you don’t pay off monthly is charged an interest rate. If you have a high interest rate and you can’t afford to pay off your card monthly, you’ll end up racking up way more $$$ on your bill than what’s manageable.
- Pay off your monthly bill in full when possible. The easiest way to have good credit is to be responsible for paying it back. If you can pay the full amount of your bill each month, it’ll show credit institutions you are a trustworthy borrower and decrease the interest you owe.
- Pay your bill ON TIME. We truly cannot stress the importance of this one. Don’t miss a payment. Don’t be late on a payment. If you listen to one rule in the credit section, it should be to pay your monthly bill on time, or early, NEVER late.
Credit is important not just to have access to money, but it is also used to gauge the responsibility of a person by employers, lending institutions, landlords, and more. Basically, to do anything in the adult world, you need a good credit score. A credit score can range from 300 – 850, with higher numbers being better. Check your credit score regularly to understand where you are and make a plan to raise it if it’s too low.
Save, Save, Save
Having a cushion in tough financial times can be a saving grace. You can even open a high-yield savings account which will grow over time. Saving takes practice, and even adults who have been financially independent for decades struggle with setting money aside and saving it. Here are a few saving hacks:
- Save before you spend. If you have a certain amount of money coming in each month from a job or other source, pay your bills and essential things, set aside money for your savings, then you know how much you have left to spend on discretionary items. Don’t do this the other way around; if you spend first and only save what’s leftover, you won’t save nearly as much.
- Build up an emergency fund. A good amount to aim for is 6x your monthly spending. This is an imperative habit to put in place quickly; post-grad expenses can be a lot bigger than those you faced while in college. A proper emergency fund will ensure that if something goes really wrong, you’ll still be able to live off your savings for six months or so.
Building healthy money habits takes time and you have to figure out what works best for you. There are lots of tricks to ensure that you’re living responsibly and not overspending, such as building a budget and tracking expenses. Keep the following in mind:
- Your budget doesn’t have to be complicated. Many people fail to keep up their budgets because they overcomplicate them. While you can have a very detailed, itemized budget, you can also build a simple budget by categories. We recommend starting simple, then adding in detail to your budget as it becomes helpful.
- Track your spending and adjust as needed. Once you graduate, your expenses may get higher and you’ll likely have a steady paycheck coming in, so it’s important to keep your spending in check. Be honest with what you’re spending and where it’s going. Tracking spending will give you a cohesive view of your habits and allows you to refine your approach with money.
- Live below your means. If you’re spending all your money each month with no leftover savings and racking up credit card debt faster than you can pay it off, you’re living above your means. Avoid this behavior because it will continue to compound and create larger financial issues.
Major Life Purchases: Buying a House
Once you graduate and have a steady income, you’ll be faced with the decision of if you’d like to keep renting a place to live or if it’s time to buy. Real estate can be a great investment and is a good asset to have, but buying a house is a major financial decision and can put your financial health in jeopardy if you’re not careful.
- You’ll need a good credit score to get a mortgage. Getting a loan for a house is much more difficult than getting student loans, so work with a professional to assess your credit and see how big of a loan is feasible for you.
- Save for a down payment. Most houses will require a 10-20% down payment, so you’ll need to have a large amount of cash ready before you can purchase. With an FHA (Federal Housing Association) loan for first-time home buyers, you’ll only need to put down 3.5%. This makes it a bit easier for people to break into the market, but we recommend putting down as much as you can to incur as little interest as possible in the long run.
We know, it seems kind of crazy to start planning for your retirement the minute you start working but putting money into a retirement plan is so important! Depending on where you work, your employer may offer a retirement matching program. Take full advantage of this because it’s basically free money! If they’ll match monthly contributions up to 6%, you should be putting in at least 6% each month. There are different types of retirement accounts, such as a 401(k) and an IRA, but the most important thing is to just start saving.
- 401(K) Account: This is an employee-sponsored retirement plan. Typically, you’ll select an amount of your monthly pay to be withheld and put in this account and the contributions are pre-tax.
- IRA: An IRA (Individual Retirement Account) is a retirement savings account that is set up privately by an individual. The money put in is after-tax and the investment options are a bit more flexible than with a 401(k).
Keep in mind that retirement accounts can be very nuanced, so do your research to figure out which is best for you. If you’re working through your employer, you’ll likely select either a 401(k) or Roth IRA, which some employers have started to offer.
When Disaster Strikes: How Bankruptcy can help
Developing a responsible mindset around money is so important but sometimes something unforeseeable happens, or your small financial mistakes add up to something that can’t be fixed easily. The most important thing to remember is that there are people that can help you and systems in place to lift you out of financial turmoil. If you feel like you may have a financial problem that’s insurmountable, talk to a professional to better understand all your options. Declaring bankruptcy is a powerful option when it comes to recovering your finances, but it can be complicated to understand. Simply put, bankruptcy is a method of reorganizing your debt or dismissing your debt because you are unable to pay it back. First, there are a few types of bankruptcy:
Filing Chapter 7 Bankruptcy
Chapter 7 bankruptcy centers around a liquidation plan, which means dissolving your debts with no repayment commitments. You’ll only be eligible for this type of bankruptcy if your income is below the median income in the state you’re filing in. The kicker to Chapter 7 is that you’ll most likely end up agreeing to liquidate your assets in the process, which means giving up ownership of many of your things. There are a few exempt items such as your home or car; you may be able to retain ownership of these items as long as you make timely payments on them.
Filing Chapter 13 Bankruptcy
Chapter 13 focuses more on building a new repayment plan for all your debts. This is an individual filing for someone who makes too much money to qualify for Chapter 7. Instead of your debt getting liquidated, a new repayment schedule will be put in place to make it a bit more manageable. The repayment plan must be approved by a court Trustee who is responsible for disbursing payments to various creditors. You’ll pay the Trustee a set amount monthly and they will ensure the debts you have are paid off accordingly. After 3-5 years of successfully working through your debt repayment plan, your remaining debts are eligible for liquidation.
Filing Chapter 11 Bankruptcy
Typically, Chapter 11 is for when a business becomes insolvent and cannot pay its debts. This process centers around a reorganization of the business and sets a feasible repayment plan. This is similar to Chapter 13 in that a Trustee will need to approve the repayment plan and help disburse payments to creditors. Once the repayment plan is completed, the remaining debts may be dissolved.
If you remember one thing from this article remember this: you are never alone and there’s always a path forward. There are professional firms and lawyers who specialize in helping individuals and businesses navigate the world of money and bankruptcy. Don’t wait to ask for help if you feel that you may be in over your head.
The School of Hard Knocks
Though college is a great place to start building smart money habits, going out into the real world with no safety net is a big change. You’ll be making more money, spending money on big purchases like a house, and dealing with planning for retirement. There’s a lot to think about and mistakes are bound to happen, so take advantage of all the resources around you to be successful. We’re located in Decatur Georgia and have helped local Georgia residents for over 25 years. Schedule your complimentary consultation with us this week. Follow the tips we have shared in this article and don’t be afraid to reach out to us, a financial planner, accountant, or other professional for specific questions. If you have any further questions feel free to reach out.