Graduation = Entering the Real World
May 3, 2010
This is the time that college graduates say good-bye to the "sheltered" life and hello "real world". Is your graduate ready to make the tough financial decisions? The best graduation gift may be a "money talk".
Taking Responsibility for Self
For many new graduates, this will be the first time they are required to be totally responsible for themselves. Making good choices now may mean the difference between always struggling with finances and gaining a secure financial future. Being financially literate, understanding the cost of debt, and learning to enjoy a lifestyle within his/her means are all key to your graduate's successful management of his or her financial life.
Students graduate from college and immediately get submerged in money issues. How much should I expect to make in my first job? What can I afford to spend on an apartment? Where do I purchase car insurance? What are the consequences of not paying off the monthly credit card bill?
A little guidance in all of these areas is important for getting started on the right foot.
The Key to Budgeting: "Limitize"
Forget “supersize”! Teach your graduate to "limitize". This means limiting spending to what he or she can afford. Once the starting job salary or wage is known, help your graduate layout a budget. Given the location where the graduate will be living, determine the cost-of-living relative to their home locale. Search on the website for average spending numbers and start building the budget using these percentages as a guide. Determine the fixed expenses, which are those items that will consume a part of the paycheck every month, such as rent, utilities, student loan payments, transportation costs, and other work related expenses.
Make sure your graduate notices that entertainment is not part of the fixed expenses! Dining out, movies, clothes, hair cuts, socializing with friends are all variable expenses. Only money left after paying the fixed obligations can be spent on these items. The better the graduate becomes at managing and controlling the fixed expenses, the more money left for the variable spending!
Find a Way to Save
The farthest thought from the mind of a new graduate is saving for retirement. As tough as the concept may be to communicate, be sure the graduate understands the value of the "saving habit". It isn't necessary to stress the amount saved as much as the act of saving and investing some portion of each paycheck.
Debt Management
Taking on too much debt is the greatest hindrance to financial security. Some debt, such as education and car loans, may be unavoidable. School loans for which payments were deferred during the college years will soon require a monthly payment. Educational loan consolidation may be helpful for establishing a reasonable payment over a set period of time.
To purchase a car, a new graduate will likely need a car loan. The cost of buying now and paying later is the interest rate. Help the graduate understand the total dollars going out during the period of the loan to pay the loan interest. If you are successful, you won't need to tell them how important it is to shop for the best loan rate!
The curse of money management is credit card debt. Credit cards can be a terrific money management tool if used appropriately – that means paying off the outstanding balance each month. Allowing a balance to accumulate on the credit card at an interest rate of 18% to 21% can create a financial "Bermuda Triangle". Credit card debt is definitely a black hole that is very difficult, if not impossible, to pull out of. Generally, credit card debt is created to fund a lifestyle that can not be sustained by the individual's income level. A prolonged strategy of "buy today and pay tomorrow" will lead to quick financial ruin.
Summary
What’s the best gift for your graduate? Financial advice that gets the graduate started on a solid financial foundation. Plan to have an adult-to-adult conversation about handling money. Or, if this type of advice is better coming from someone else, then spend a little money and get your graduate to a financial planner. It will be the gift that lasts a lifetime!
