Financial Skills Every Graduate Needs
You have just graduated from college, and it is time to start taking on adult responsibilities. But, as you are looking for a job and thinking about the future, you realize there are some things you have no clue about.
Don’t worry; this is just the nature of growing up. You didn’t know much about playing football, or driving a car, or even studying when you first started each, but you learned as you practiced. For most things, that’s way it should be.
One of the few aspects of being an adult that you should really learn quickly, and from the experts, is your finances.
Unfortunately, big missteps in this area can haunt you for a long time. It is best to get off on the right foot so when other life milestones occur - marriage, homeownership, children - you will be prepared, at least financially.
There are three main areas to focus on as you are starting your career and dealing with your own budding finances: building credit, paying off debt and investing, and buying a home.
So many things you want to do depend on your credit rating: getting a credit card or a loan, renting an apartment, buying a car, and buying a home. Depending upon your situation in college, you might already have some credit built up, or you might not have any at all.
Banks and other businesses use your credit score to judge what kind of a risk you are. How likely are you to pay them back if you borrow money or purchase things on credit? Having no credit score is almost as bad as having a poor score, because you have no history to demonstrate your ability to pay back your creditors.
Luckily, there are ways to build good credit. One comes directly from your college days: student loans. Most millennials have some student loan debt. As a matter of fact, the average millennial college graduate owes $30,000 in student loans. While possibly scary, this debt is the first way to build good credit. By making your monthly payments on time every time, you begin to build credit. Additionally, if you're struggling with student loan payments, you might consider student loan refinancing. Refinancing your student loans can help lower your monthly payments and interest rates, making it easier for you to stay on top of your payments and build your credit.
Another easy way to build credit is through a credit card. By getting a good credit card, using it and paying if off completely, on time, every month, you will start building good credit. Just be careful with this one. Having a credit card and overspending has been the downfall of many a credit score. The key is responsible use. You want to use it but pay it off every month, on time. If you aren’t able to pay it off, pay as much as possible. Ideally, you never want to have a balance on the card that is more than 30 percent of the total available credit. This shows lenders that you are responsible with your spending and reliable at paying off debt.
Paying off debt vs. investing in retirement
This is a difficult subject, and even the experts don’t completely agree on the best course. It does actually depend upon your personal circumstances. However, here are a few things to consider.
First, how much of your income is needed to make your student loan payment? If you are struggling to pay bills and make your student loan payments, then paying down your debt really needs to be tackled first. Defaulting on student loans is not a good way to start out your adult life.
If you are making enough or have low enough bills that you are able to pay living expenses and pay off debt with money left over, than the question becomes a little different. Do you pay extra on your student loans or do you start saving for retirement? There are differing opinions on this, but there is at least one definite everyone agrees on: if your employer matches contributions to a retirement account you should take advantage of this. Invest the full amount needed to get the full match. This is basically free money.
After this definitive point, there are a couple of considerations. First, what is the interest rate on your loans? If you have higher interest rates (anything over 8%), it might make sense to pay off your student loan before investing. The average rate of return for investments in the stock market is around 7%; so, if you are earning the same amount or less with investments as you are paying in loan interest, it makes sense to first pay off the principle on your student loans.
If you have lower interest rates on your loans, it makes more sense to put more money into investments to let your money earn more. Even though it would feel good to be free of debt, you need to remember the idea of compound interest. The more you can put away now, the more you will have in the long run. This is a lesson that many 40-to 50-year-olds wish they had learned earlier in their lives.
Buying a home
Once again, this is a difficult problem with multiple facets. There are a couple reasons to not buy a home.
You are not sure where you will be in year. There could be several reasons for this. You might just hate your job and want to try something else, or maybe you just want to try a different climate. You may just want to move away from your hometown. Your current job might be transferring you, or maybe you just travel a lot for your job. If any of these are true, you will be better off renting until you are settled in a location and/or job you love.
You just aren’t ready for the responsibility. If you are still figuring out who you are as an adult, you probably aren’t ready to own a house. Not only will it tie you down to one locale, you will also have to be responsible for upkeep and repairs. Also, if you are single, but looking to eventually get married, you might want to wait to make choosing a home a joint decision. Finally, it is just a lot of debt to take on at once.
There are also good reasons to buy a home.
It is more expensive to rent than own. In most places, especially metro areas, rents keep rising. Even when you include the costs of repairs and upkeep, for similar houses it is still cheaper to own than rent. Plus, if you own the home, you have the option of getting roommates to help you pay the mortgage.
You will be building equity. In most cases, the value of a home will continue to increase. You have to live somewhere. If you own, the money you put towards a roof over your head builds equity. When you are ready to trade up or retire, you can use the equity for a down payment or to help fund your retirement.
There are emotional benefits. There are several points that fall under this category. People who own their homes are more likely to be invested in their neighborhood and community. The security of having a place of their own means a lot to many people. One of the best perks of homeownership is the freedom of being able to change the space however you want.
So, after all that, you decide you are firmly on the side of owning a home. There are many financial considerations with this decision, but these two are the most immediate:
How much you can afford? Experts say your mortgage costs should be no more than 35% of your pre-tax monthly income. You might want to actually include the cost of your homeowner’s insurance and property taxes in that amount, which are usually included with your mortgage payment anyway. Anything more than 35% and you will probably be struggling. If you still have a large amount of student loan debt, you might need to go even lower. Conventional wisdom says that no more than 45% of pre-tax income should go towards debt.
How much you have saved for down payment and closing costs? Standard rules say you should have 20% of the property value saved for a down payment. However, there are exceptions to this. Some lenders will underwrite loans with anywhere from zero down payment to 6%. There are also state and city assistance programs in some places, as well as federal programs. You can also finance your closing costs. If you are set on buying a house, but don’t have the savings you would like, do your research and find an experienced and knowledgeable mortgage broker who can show you all of your options.
Further Reading from Skills You Need
This four-part guide takes you through the basics of numeracy from arithmetic to algebra, with stops in between at fractions, decimals, geometry and statistics.
Whether you want to brush up on your basics, or help your children with their learning, this is the book for you.
I think most millennials will agree that money is not everything. However, money problems can be all-consuming and affect your overall happiness. To avoid financial woes, take the time to educate yourself about personal finance. It will save you from future headaches.
If in doubt about anything, never be afraid to consult a financial planner. Even the experts cannot agree on one clear course for everyone, so a professional can help you find the best path by looking at your personal circumstances. The worst thing you can do is nothing, so be proactive in your financial education.
About the Author
Valerie, originally a computer programmer, is just starting her new career as a writer. She loves the sun, her Australian Shepherd dog, and her husband. When she isn't mountain biking, practicing her public speaking skills, or reading, she is writing about everything she has learned.