9 Money Tips for College Grads

As a college grad with a diploma so new, the ink’s still wet, you feel at the top of the world right now! Congrats and welcome to adulthood. As you’ll soon realize, being in the real world is different than college and you should start practicing these vital money tips for college grads as soon as possible to help you make a financial plan for your first few years out of college that can pay invaluable benefits for the rest of your life.

This guide will be broken down into several different sections:

• Student Loans
• Buying a Car
• Buying a House
• Investing
• Credit Cards
• Professional Advice

Repaying Your Student Loans

If you’re like the average college graduate, your student loan balance is right around the $37,000 mark and your projected monthly payment will be approximately $350 for the next ten years.

Avoid Capitalized Interest

The first six months after graduation is considered a “grace period” for your student loans and no payments are required yet. This gives you time to start your first real job and get into a routine of earning an actual paycheck, paying your rent and utilities, and finding your financial groove.

Shortly before your loans enter repayment status, your lender or loan servicer will send a notice stating how much deferred interest from your four years of college will capitalize after the grace period ends. When your student loan interest capitalizes, it becomes part of the principal balance and you begin getting charged “interest on interest” which adds to the cost of your loan and increases your future monthly payment.

For example, if you borrowed $36,000 in student loans which accrued $3,000 worth of interest that you didn’t pay a single penny on during your college career, that $3,000 rolls into the original student loan balance when the grace period ends and you begin accruing interest on $39,000.

Any payment you make before the grace period ends will be applied to the accrued interest first. If you have any extra cash, try making extra payments to avoid this hidden expense. Paid student loan interest is tax-deductible so it’ll help you save money when you file your tax return.

If you made interest-only payments on your student loans while in college, you won’t have to worry about making this lump-sum payment.

Consider Refinancing Your Student Loans

Now that you finally have a real income or a better credit score, you might be able to reduce your interest rate to get a smaller monthly payment by refinancing your student loans. Refinancing can also extend your loan duration so you have more time to repay your balance; only consider this option if you’re struggling to make the current minimum monthly payment because you’ll pay more in interest and stay in debt longer.

If you’re on a low income and want to retain your federal loan benefits by consolidating your federal student loans you can qualify for an income-based repayment plan that reduces your monthly payment but doesn’t reduce your interest rate.

Buying a Car

If you’ve driven a clunker through college that barely got you back home, you’re ready to get something more reliable; and you should. But don’t make the mistake that many new college grads make by buying an expensive vehicle that’s going to depreciate quickly and lose half of its value in the first five years.

You can still buy a reliable used car that’s a couple years old for a fraction of the cost of a new car that will last you several years until you have enough cash to buy another car or get your student loans paid off. If possible, buy a car with cash so you don’t have to borrow money and have one more car payment.

A car just needs to be big enough to meet your daily travel and driving needs. Don’t get a fancy sports car to “keep up with the Joneses.” Once you’re on a better financial footing, you can think about this. Until then, find a car that’s better than your current one and don’t give into the recent grad discounts that give you $500 off, but you still have to repay $20,000 back with interest for the next three to five years.

If you need to borrow money to buy a car, make sure the monthly payment is less than 20% of your monthly income. Cars lose value every day, so don’t spend more than you have to because you’ll never get that money back. And, the interest payments aren’t tax-deductible.

Buying a House

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Pay Rent or Buy a House?

As a new college grad living in an apartment, you’re going to get bombarded by co-workers and family members that are going to tell you to buy a house ASAP so you start paying your mortgage payment instead of your landlord’s payment.

Not so fast.

Paying rent is more expensive than a 30-year mortgage monthly payment in many real estate markets, but you should pay rent for these reasons:

• You might move or change careers in the next few years
• Don’t have time for home repairs and maintenance
• Cannot afford the 20% down payment to avoid private mortgage insurance

Buying a cheap car with cash means you can use the extra money that your fellow classmates will spend on a car payment can be used for saving for a home mortgage down payment instead (or extra student loan payments).

Waiting to buy a mortgage can help you buy a family-friendly starter home once you have enough cash in hand to afford the 20% down payment after your current rent agreement ends. If you buy a house right out of college, you have to sell the house first before you have enough money or equity to buy a new house. Since you might buy too small as you’re single and can’t accurately predict where the future will take you, paying rent is an insurance policy for career and family change.

Know How Much House You Can Afford

Also, waiting to buy a house means you can buy a better house the first time. It’s recommended to only buy a house that’s up to three times your current annual income. If you make $40,000 a year, that means the most expensive house you should buy is $120,000. If you buy a more expensive house, you might get stuck in a high-paying job that you don’t like but can’t quit because you won’t make enough money at another job to cover the mortgage payment. This scenario is called “The Golden Handcuffs” and it happens to more people than you think. Hang around your older co-workers long enough to find out and they’ll tell you the only reason they haven’t quit yet is that they can’t afford to quit because their monthly bills are too high.

Investing

The best way to become a millionaire and retire on-time (or early) is to invest as much as possible as soon as possible. Your 20s are the most important decade to invest because your investments have an entire lifetime to earn dividends and appreciate in value.

Even if the stock market scares you because you don’t understand the fundamentals or how to execute a trade, automated investing and target date funds have become popular and make it easy for anybody to invest, even if you can only contribute $100 a month.  Any amount is still better than nothing!

With a small portion of your portfolio, you might even consider alternative investments like real estate or peer-to-peer loans to earn an 8%+ annual return while avoiding stock market volatility.

Credit Cards

Are credit cards good? Credit cards are a good way to build your credit score without paying an annual fee or interest charges, if you pay your balance in full every month and don’t spend more than you should.

If you get a credit card, look for a cash back credit card with no annual fee. This is the easiest and most affordable way to boost your credit score and earn rewards points in the process. Only apply for a rewards credit card with an annual fee if the rewards are greater than the annual fee.

Don’t apply for any credit card if you’re going to carry a balance from month to month and damage your credit score, plus pay 15%+ interest rates on your unpaid balance.

Professional Advice

Starting your career on the right foot is just as important as how you manage your money. After all, a job promotion means a pay raise which is one of the easiest ways to get out of debt sooner and save more money worry-free.

Network With Others

This might be the most important nugget in this article. Stay in touch with your classmates and co-workers, you never know when you’ll need them as a reference or inside connection to get an exclusive job interview that helps you find the job you love.

It’s not always what you know, but who you know.

Don’t Always Chase Advanced Degrees

Even though a good number of your classmates are going directly to graduate school, med school, or law school before entering the workforce, this isn’t required for every profession. Graduate school costs significantly more than undergraduate which means you go further into debt. With the student loan debt bomb currently at $1.3 trillion, borrowing more money might not be the best idea if you’re not sure if you’re going to remain in that career field, or how long it will take to repay the degree.

If the pay raise doesn’t justify the tuition costs, you might be better off skipping grad school at this time. You can always go back later, or realize you’re just fine without sacrificing your evenings for the next two years.

Summary

Have you heard any of these tips before? If not, start putting these to use right now. Also, leave a comment with which tip is the most valuable to you and don’t be afraid to share with your friends!