You’ve graduated from college and have your first adult job and a new lifestyle. Your job comes with a salary that’s larger than any you have had previously. Our advice is to continue to live like a broke college student. Each time your income increases it’s easy to increase your spending to consume all of your income. If you avoid the increased spending you can save a lot more money and pay off that college debt more quickly.
Consider living at home for a while. About 85% of new grads move back home—at least temporarily. Moving back in with mom and dad may not be your first choice, but it’s a temporary living conditions not a forever decision. Paying your parents minimal rent provides you with financial flexibility so you have time to adjust to your new financial situation. You can map out a plan for paying back credit card debt and student loans. You can save money for a deposit on a new place to live when you move out. This temporary living arrangement allows you to consider your salary and new expenses so you can create a budget that will keep you solvent after you move out of your childhood home.
Now that you have a steady income, it becomes easy to run up the credit card charges. After all, you are making a good salary and you can repay the credit cards, right? Too many people fall into this trap, make the minimum payments, keep spending, and drown in debt. Paying high interest rates on credit card purchases, plus paying fees if you miss a payment is money wasted. You may as well flush that cash down the toilet. Do everything you can to avoid credit card debt.
If you do have credit card debt, develop a plan to pay it off as soon as possible. Figure out your entire debt picture, your monthly payments for each debt and how much extra you can afford to pay on your debt. Focus any extra funds on the lowest balance first. Keep pouring any extra cash on this first debt while making minimum payments on the other debt. Once the first debt is paid in full, focus that extra money on the second smallest debt, and add what you were paying on debt #1 to the minimum payment you were already making on that second debt. And keep going by rolling over the payments to the next smallest debt.
There are a few different philosophies on the order in which to pay off debt: highest balance, highest interest rate, lowest balance and lowest interest rate. Over the years, we have seen more people have success by tackling the smallest debts first. Getting a quick win by paying a debt in full provides a sense of progress that will keep you motivated longer than slogging along for years trying to pay off the highest balance.
While you focus on your credit cards, put your student loan payments on auto pilot. Don’t worry about fast tracking your student loan debt until your credit cards are paid off.
In college, you may have used your parents as an emergency fund. Now it’s time to build your own emergency fund. Your initial target is for an emergency fund is $500. Once you have achieved that, increase it to $1,000, with the eventual goal of having six months of income saved for emergencies.
It’s also time to start investing for your retirement. The time to start saving for retirement is the first day on your job. Starting early means you can maximize the power of compound interest (earning interest on the interest you earned previously). Enroll in your employer’s 401(k) plan, especially if they offer a matching contribution. You can also use a Roth IRA to bump up savings faster.
Along with an emergency fund, and retirement savings, be sure you have the insurance you need: health; car; rental; disability and life insurance. You never know what is going to happen in the future and some level of insurance will protect you against financial disasters.
While you have a little breathing room between college and living on your own, define some goals for yourself. What does a successful life look like to you in the next year, next five years, next ten years? Write down your goals and your specific plan for achieving each of them. “Save money” is not a specific goal and it is not actionable. Instead, define your goal as “save $100 each paycheck and put the savings in a bank until it totals $1,000 then move the money into a mutual fund.” That is specific and actionable.
If you don’t have goals and a specific plan to achieve those goals you will be very successful in accomplishing nothing.
One perceived trend among millennials is job hopping, which Pew Research disputes. According to them millennial turnover and employer loyalty is comparable to, if not slightly better than, at least one generation that came before them.
Millennials may be better at taking a long distance view of life and using more part time and temporary work as a way to live a full life instead of being chained to the same job for 10, 20 or 30 years. This mindset allows for more opportunities, and different types of work and experience. The amount of time you spend at a job is not nearly as important as what you learn from a job. Don’t base your employment decisions on what you think you’re supposed to do, what your parents want you to do or what the rest of your generation is doing, instead, focus on your long-term goals.
Identifying your goals and actively following your passions will result in a fuller, more satisfying life. And the fullest life you can have is to discover the unique purpose for which God has created you.
Join us on the Compass Catholic podcast for more about how to manage money in your 20’s.