This time of year is when millions of Americans (mostly younger, some not so much) will stride across a stage to accept their diplomas from some type of higher education institution.
As a token of our congratulations, we will spend the next few weeks imparting some (hopefully) valuable money and life lessons to these new grads.
Since this column is entitled “On Your Money”, it’s probably best to start with the money lessons first.
1. It’s not how much you make
It’s likely that the income you will earn from your new degree was one-of-if-not-the primary consideration in choosing to go to school, and what to study.
But your future income will not necessarily determine how happy you will be, nor is it the main factor in determining if and when you will reach financial security.
Instead, it’s how much you spend.
The less money you spend now and in the future, the more you will have to save now, and the less you will need to accumulate to be financially independent in the future. And the less you need to accumulate, the sooner you can become financially independent.
Therefore, rather than (just) trying to make as much money as you can, you should try to reduce or eliminate any unnecessary spending wherever and whenever possible.
2. Live like you just did
Chances are you had to scrimp and sacrifice to afford to get your degree. Now that you have that diploma, don’t feel like it requires you to move on up to a much more expensive lifestyle.
Instead, try to find some compatible roommates to share a rented living space. If you have to live on your own, get the smallest place you can stand in the safest possible neighborhood.
Once you have a job, it is unlikely you will spend very many of your waking hours in your new place, anyway.
If public transportation and taxis are an option, you may not want or need the cost and headaches of owning your own car. But if you must buy something to drive, go for a reliable older model instead of a brand new one that has a hefty monthly loan payment.
3. What to do with “extra” money
Once your net monthly income meets your basic monthly expenses, you have an enviable dilemma on your hands: where should the rest of those dollars go?
Begin by getting a “rainy day” fund set up. Three months’ worth of your monthly expenses is a must, six months’ is better, and twelve months’ of expenses is enough.
(Sharp-eyed graduates will note here that the less you spend, the less you need to have set aside in the rainy day fund).
One smart way to start accumulating these funds is through pre-tax payroll deductions in to a retirement plan at work, and/or an IRA or Roth IRA on your own.
Assuming an equal hypothetical annual return on your investments, saving $5,000 per year from age 22 to 32 will give you more money at age 65 than if you saved $5,000 per year from age 32 to age 65.
Also, you may be ambitious or paranoid enough to want to start paying off your student loans as quickly as possible. But you’re better off making the minimum payments required, and instead using any extra money to build your rainy day fund and save for retirement.
4. Protect your credit score
Your credit score will determine not only if you get a loan and the terms of the loan, but it also can affect your insurance costs, rental possibilities, and even your employment opportunities.
Invest a few bucks at www.myfico.com to get your current score from one of (or all three of) the main credit bureaus. You will also be able find out ways to improve it, as well as what actions can negatively affect it.
And if this column is being given to you by a parent, grandparent, or other loving friend or family member, perhaps they could pay the cost of getting your credit score as an appropriate graduation gift.