Spring Commencement is over and the Class of 2017 is entering the workforce. Gone are mornings that begin at 10 a.m., nap-filled afternoons and endless nights at the library! For most college grads, this rite of passage entails numerous lifestyle changes. And managing that paycheck is a major one.
Just one short year ago I was in your shoes. In that amount of time I’ve become a pro at navigating the “adult” world. Here are a few tips and tricks for jumpstarting your early earning years and getting set for a financially secure future.
Beware of Lifestyle Creep
Few things are sweeter than your first big paycheck! So sweet, you may be tempted to view this newfound spike in income as a way to rationalize unnecessary purchases. Spending $1.95 on a tall cup of freshly brewed coffee at Starbucks each morning is just a small splurge, right? But if you stop every day for a week, your Starbucks caffeine fix will cost more than $13.65. In a year, your “innocent” habit will burn a $507 hole in your pocket. Upgrade that tall coffee to a grande mocha latte and you’re out more than $1,300 over the course of a year!
Pro Tip: Nip this poor spending habit in the bud by brewing your own coffee or drinking from the office pot.
Coffee may not be your particular small indulgence, but I bet you have several others. What I’ve described above is a classic example of lifestyle creep. Investopedia describes ‘lifestyle creep’ as a situation where peoples’ standard of living improves as their discretionary income rises. When lifestyle creep sets in, you consider former luxuries to be necessities. Lifestyle creep can sneak into any budget category – from ordering take-out several times a week to upgrading your iPhone every time a new model is introduced. Poor spending habits can put your financial wellness at risk.
Sad Truth: Budgeting Isn’t Easy
The core element in any recent graduate’s financial plan is a budget. It’s essential that you create a realistic budget based on your after-tax income. Creating a budget isn’t difficult — but sticking to it is. Dinner, drinks and Uber rides add up quickly. One weekend out with friends can inflict significant damage to your monthly budget.
Pro Tip: Try envelope budgeting. Stash your monthly entertainment cash inside an envelope. Once you spend it all, you’re done. At least until the next month begins!
Challenge yourself to live within your budget. If you foresee overspending in one category, cut back in another. Budgets are meant to be flexible. Review your spending estimates to see how accurate they are, and make necessary changes.
Do you have your budget in order but find it difficult to record your expenses in a meaningful way? Or are you constantly forgetting to record your expenses altogether? Luckily there’s a fix for that!
Pro Tip: Give one of the popular budgeting apps a try. Simply sync your debit and credit cards to the app and the software will track and categorize your purchases for you.
Maximize Your Savings with Free Money!
Retirement isn’t on every college grad’s radar right after walking across that stage, but it should be. According to the U.S. Census Bureau, the average American retires at age 63. Assuming you graduate from college at age 22, you’ve got 41 years to save for retirement. Most employers offer retirement plans, such as a 401(k), that allow employees to invest a percentage of their paycheck before taxes are taken out.
Often times the employer also makes a matching contribution as an incentive to employees to save for retirement and provide competitive employee benefits. You must contribute to the plan in order to receive the employer match. The employer’s contribution to your 401(k) is commonly referred to as “free money.”
Pro Tip: The general rule of thumb is to contribute, at a minimum, the amount it takes to receive the full employer match.
For example, if you earn $50,000 and your employer makes a 50-percent match on your contributions up to a maximum of 3 percent of your salary ($1,500), you would need to contribute 6 percent ($3,000) to the account in order to maximize the employer contribution. Work aggressively to increase your contribution. The maximum amount an employee can contribute to a 401(k) in 2017 is $18,000 (or $24,000 if you’re age 50+). Read your employee benefits package or speak to human resources to investigate the retirement plan options offered at your company.
Be smart about your money! Create a budget and learn to live within it. Don’t allow unnecessary spending habits to get you off-track. Save early and save often. And now for the final Pro Tip: The secret to getting rich is to live below your means!