Free Budget Spreadsheet
Stepping into the real world can be intimidating. You start finding out through experience that there is a lot you do not know—a lot they didn’t teach you in school about being a responsible adult. Among the most stressful is how to spend, save, or invest your money. In most cases, unless you majored in business or finance, you probably didn’t get much information on how to handle your finances. You go from a broke college student to holding a sizable amount of money in your bank account.
Free Financial Checklist
It can be tempting to go ahead and spend it all. Especially after going through 4, 6, or even 8 years of schooling living an extremely frugal lifestyle; ramen or pizza hut specials anyone? Although there is nothing wrong with a little splurge after graduation, it’s the financial decisions you make after college that build habits – they make you, or break you – setting you up for a bright, or grim future.
Knowing the importance of our first financial steps should lead us to take action.
There is a lot that needs to be considered after graduation. How much do I spend on daily expenses, how much should I put towards my student loans, or how much do I invest? All valid and importance questions. Because of their importance, it can often overwhelm and make us hold off from making any decision; which leads towards more temptation to spend, and live paycheck to paycheck.
This article is geared towards giving you a quick guide on how to organize yourself financially after college. If you’ve taken the time to read some of our financial posts, you can probably tell that we are huge proponents of paying debt off quickly; we believe it’s one of the surest investments you can make. That being said, everyone’s goals and situations are different. What may work for one may not work for the other. The objective is to build your net worth as quickly as possible, regardless of the approach. Below are steps meant to orient you towards the right path, setting you up for financial success.
1. Calculate Daily Expenses
This classification should include first, all essential living expenses – food, rent, utilities, and transportation – and then any other extracurricular expenses. Living expenses should require no more than half, or 50% of your take home pay.
Make sure you put together a solid budget, and name every dollar. Make categories for everything: groceries, rent, eating out, entertainment, gas, insurance, and even spontaneous events. We recommend you use a spreadsheet that adds up all expenses automatically. This will help you keep track of how much you are spending on a monthly basis.
Tool: Applications like Mint (free) are very helpful in creating a budget, and allow you to track your expenses on any electronic device.
2. Create Emergency Fund
Open a savings account, preferably one that pays interest, where automatic deposits are made every pay period; approximately 10% of your income. This will lessen the temptation of spending your hard-earned stash. Out of sight, out of mind. This account is set up specifically for unforeseen expenses.
Ideally, you want to have at least 3 to 6 months’ worth of daily expenses built up in this account. Start by committing yourself to save your first $1000 the first year out of college. Putting aside $85 a month will painlessly accomplish this goal.
This amount should be able to cover expenses such as car repairs, medical fees, speeding tickets, and any other unexpected costs thrown your way.
Tool: Here is a unique way you can start receiving rewards for you good efforts. By joining SaveUp (SaveUp.com) and linking your savings account you can win free rewards in the form of: lotteries that pay cash prizes, gift cards, vacations, and more. Talk about positive reinforcement.
3. Setup Loan Repayment
After calculating your daily expenses – which again should be no more than 50% of your take home pay – setup your loan repayment plan. Most financial planners agree that you should not spend more than 15% of your pre-tax salary (yearly salary before taxes are taken out). If 15% is not feasible in your case, you may qualify for lower payments. For more information, go to studentaid.gov.
Pay off loans with the highest interest first. Tell the company that sends your bill to apply your payments to the loan with the highest interest rate. Otherwise, it’s divided equally among all loans. Request that any extra amount outside the minimum payment be applied to the loans principle. This should cut your overall interest costs and shorten the length of the loan.
Use opportunities that provide you with extra money – a recent raise or annual tax return – to pay a little extra on your loans. According to bankrate.com, paying just $50 more a month on a $30,000 loan over a 10-year period can save you $1,130 on interest costs.
Remember, you can also deduct up to $2,500 in student loan interest to reduce your taxable income. Keep this in mind when you get ready to file your taxes.
Tool: Estimate monthly payments, calculate total interest paid, and compare various government repayment options on the Department of Education’s website: studentloans.gov.
4. Save For Retirement
Start now. Do not wait. The earlier you start, the better off you will be in your golden years; thanks to something called compound interest. Enroll in your companies 401K match program. This means that your company will match your contributions to your 401K account dollar for dollar; usually up to a certain percentage. Free money. You won’t be able to take it out for the next 40 years, but it’s yours. We recommend you start by meeting your companies match percentage – usually between 4% to 6% – and work your way up to 15% of your salary.
This doesn’t hurt as much as you might think. Unlike your salary, taxes don’t come out of your 401K contribution (pre-tax). So funneling $100 to your 401K account takes approximately $85 from your take home pay – pretty sweet huh?
If your company does not have a retirement plan in place, consider opening a Roth IRA. Roth IRA contributions do get taxed on the way out of your paycheck, but they are allowed to grow and be withdrawn tax-free once you reach retirement age. They’re offered in most banks and investment firms. Vanguard and Fidelity are good places to start. Make sure you pick low-cost, or “expense ratios” funds; below 0.5%.
Three basic investing principles to keep in mind are: maximize contributions, minimize fees, and diversify investments.
Tool: Use retirement calculators to see how fast your retirement savings can grow. There a various available online. A simple google search for “retirement calculators” will yield plenty for you to choose from.
5. Save For Major Expenses
Expenses under this category include a new car, new electronic devices, planned vacations, or any major purchases you will have to make in the future. You want to begin by placing roughly 10% of your income, on a monthly basis, in a savings account – preferably a money market account – separate from your emergency savings. This will assist you in maintaining financial stability whenever the time comes to buy a new car, or go on vacation. By planning in advance, and saving for future major expenses, you won’t be tempted to deplete your emergency fund; which should only be used for actual emergencies.
Tool: One way of making a little extra cash involves searching for jobs through platforms like Airwalker, Taskrabbit, and Gigwalker. This can help boost your savings, and allow you to reach your financial goals quicker.
In summary, we are looking at roughly 50% of your salary spent on daily expenses, 10% stashed into emergency savings, 15% put towards loans, another 15% saved for retirement, and 10% put away for future major expenses. This is not by any means the gold standard, but a simple guideline meant to put you on the right path. It is a good place to start, especially for someone who is having difficulty wrapping their mind around their finances. If nothing else, applying the above steps will provide you with solid basics that will put you on track for financial success.