Money

College Graduate’s Guide to Personal Finance

May 13, 2016
This post may contain affiliate links. See disclosure policy here.

 

 

Congrats, graduate. You’ve reached one heck of a milestone and I know you’re beyond excited to begin this new chapter in your life. I’ve been there and done that and trust me it’s exciting, but being an adult — it presents its own set of challenges.

Yeah, you’re independent now, have a hot new job (hopefully), and you might already be out of your parent’s house, but it’s time to get serious about managing your money. I’m not talking about keeping enough in your account to avoid non-sufficient fees or making the minimum on your credit card payments.

Neither am I talking about calling home to mom and dad because you have no money to replace a flat tire. No sir, Billy Bob (Yeah, I’m country in case you’re new here), I’m talking about some hardcore budgeting, aggressive student loan payments, retirement, and all that good stuff. Why?

Well, I sure wish I had someone to lay all of this out for me when I was 23 years old. After graduating all that was on my mind was landing a job before my six-month deferment on my student loans ran out. This is probably a major concern of yours as well, but let me tell you, it shouldn’t be your only concern. There’s much more to personal finances than getting a job and paying off debt.

I’ve been out of college for 10 years now and I believe if I’d known what I know now, I’d be further ahead. Since I’ve come upon all of this knowledge, it’s time for me to pay it forward and help you achieve some money goals. Without further delay, we’ve got quite a bit of discussion ahead of us so grab a non-alcoholic drink (so you can concentrate), a notepad, and pen because in the words of dear ole Kevin Hart, “you gone learn today.”

My Guide to Personal Finance? M’kay… where do I start?

Here are the topics we’ll briefly go over today in your guide to personal finance:

  1. Paychecks
  2. Budgeting
  3. Retirement
  4. Student loan repayment
  5. Income diversification (aka hustling)
  6. Improving your personal finance knowledge

Paychecks

Unless mama and daddy have been feeding your bank account, I’m going to go out on a limb and say you probably know what a paycheck is, right?  If not, I’m going to point out four major areas you need to keep an eye on each time your employer cuts a check for your hard work.

  1. Your Net Income – Net income is the amount of money you make before taxes and any deductions are made. This is made up of your salary or hourly wage. You should check for accuracy to ensure you are being paid at the rate you are supposed to be getting paid. There’s nothing worst than working a few months and realizing you were paid a few extra dollars less than what you were expecting. Well, maybe there’s one more thing that could be worst — being overpaid and having to pay it back.
  2. Your Gross Income – Gross income is the amount of money you bring home after the government has taken their cut and you’ve paid for things like medical insurance, voluntary benefits, 401k, charity donations (United Way, etc). These are the expenses that come out of my paycheck and I use the amount of money I gross to determine the income to include in my budget.
  3. Taxes – You want to make sure you’re paying Uncle Sam the correct amount or else he’ll be coming for you. Check your withholdings and adjust them based on your specific situation. I know nothing about taxes so I would encourage you to use this handy dandy tool they have over on the IRS website, IRS Tax Withholding Calculator.
  4. Voluntary Withholdings – Your voluntary withholdings are your medical, vision, dental, 401k, etc. Make sure you are paying for the proper coverage based on what you signed up for during enrollment. Take note of what is and isn’t working for you and make sure to make necessary changes during your open enrollment if necessary. If your job offers medical insurance, weigh your options carefully. If you don’t sign up through your employer you have to find insurance elsewhere. This option can be expensive and if you try to dodge healthcare altogether, you will have to pay a fine to Uncle Sam.

Budgeting 

You can’t get around this one. No matter what you call it, you need to figure out what you’re going to do with your money. You can call it your budget, spending plan, money plan, financial freedom plan, whateva...just make sure you write it down. You can go the paper and pen route, mark up the back of an envelope, create a spreadsheet, or use software that creates a budget for you. You need to know where your money is going if you want to get ahead financially.

There are two major components of a budget. These components are expenses and savings. The money you spend and the money you save. You want to make sure that in addition to your expenses and discretionary spending that you include long-term savings, short-term savings, and an emergency fund.  

Emergency Fund

The emergency fund may be the most important aspect of your budget. Without it, you won’t be able to handle life’s little setbacks which may end up causing you to incur debt. Debt can be avoided in emergency situations such as car repairs, home maintenance, medical bills, etc if you are paying yourself first. In addition to your emergency fund, (which should be used mainly for unemployment, disability, or extreme emergencies), save for unexpected expenses like parking tickets, car repairs, insurance deductibles, etc.

So here’s a quick formula to give you an idea of how you can set up your budget:

Income

  • (minus) Savings (unexpected expenses, short-term (summer vacation, etc), long-term (retirement, home down-payment, etc, emergency)
  • (minus) Expenses (housing, food, transportation, debt repayment, cell phone**)
  • (minus) Discretionary Spending (entertainment, cable, smartphone**, dining out)

= $0.00

**You’ll notice I included phones in expenses and discretionary spending. There’s a difference. You only need one, but whether it’s a need or a want is highly debatable. A cell phone is a simple form of communication, meaning it’s something to call your mama on. A smartphone is a complex luxury which allows you to flex on Instagram and Facebook — it’s not a need. Don’t confuse the two, okay?  

A few tools I personally use to help keep my money in check are as follows:

Personal Capital

I use this to manage my spending because it’s free. Enough said, but I will elaborate on how they nicely group your spending by category so you will notice whether your spending is getting out of hand in a particular category. Bonus points: it calculates your net worth.

Every Dollar

I use this tool to house my budget and appropriate funds. I tried creating my own little spreadsheet and the results were disastrous; therefore, Every Dollar swooped in and saved the day. I use the free version because I’m able to track expenses using Personal Capital’s free tool, but if you want to keep everything in one place, you can purchase this system by the year for $99.99. With the paid version you can link up your bank accounts to track spending and download the app onto your smartphone. Just wanted you to know that you don’t have to spend money to create a budget unless it tickles your fancy.

Capital One 360

Anytime someone asks me about our finances, Capital One 360 nicely makes its way into our conversation. Why? Because this online bank allows me to create several savings accounts for different savings goals and I’m in love.

I don’t like pooling all of my money into one savings account. I know people who house their emergency funds with house maintenance funds, clothing money, car repairs funds, etc. These Type A folks (no shade) usually have an elaborate spreadsheet to go along with that one account to itemize how much money is set aside for each goal.

I can’t do it. I tried it and I failed miserably. For me, having $5,000 in one savings account equates to buying whatever the heck I feel like, whenever I feel like it. I don’t see future car repairs or plumbing issues. I see a bright red buggy with Target written on the side, filled with non-essential items.

New to budgeting? Check out this article: Budgets: A Quick, Easy, Simple Method for Beginners.

Retirement

Please don’t think this is something that should be put off until you feel like you’ve arrived. Trust me, I’m ten years out from graduation and I’m still waiting to arrive! If I depended on arriving somewhere (like seriously), I wouldn’t have any coins stacked for my retirement at all. Luckily, I had a little common sense and I hope you do too.

Regardless of whether you’re in debt or not, contribute something to your 401k plan through your employer, especially if they offer a company match. My company provides a match up to a certain percentage, so for every dollar I contribute of my salary, up to the percentage allowed, they throw in the same amount. This is free money! Take advantage of it if it’s offered to you.

If your company doesn’t offer a company match, you still don’t have an excuse. You can still contribute to your 401K, but you have another option to consider as well — an IRA. There are two types of IRA’s: traditional and Roth IRA.

Traditional IRA

A traditional IRA is an account that holds money that can be deducted from your taxable income each year. The money will grow over time and sits in the account untaxed until retirement. You can only contribute $5,500 a year, but if you don’t have a 401k, this is better than nothing at all. If your employer does offer a 401k, the full $5,500 might not be deductible.

Roth IRA

A Roth IRA is an account that holds money that isn’t tax deductible. The money you contribute to a Roth IRA is after-tax dollars and you can contribute up to $5,500 per year. You don’t receive the tax break upfront, but when you withdraw, you won’t pay any taxes. The only taxes you’ll pay is on any earnings made on the initial investment that you withdraw before age 59 ½. You can have a Roth IRA in addition to any employer sponsored 401k plan.

There are quite a few stipulations for both IRA vehicles that I encourage you to look into so you can carefully weigh your options. Check out this article titled, How Do IRA’s Work? By The Art of Manliness. This resource does a great job of laying out all the details you should consider before pursuing either one. Also, just in case you’re thinking about skimping on investing because you’re young, I encourage you to check out this article about compound interest. Hopefully, you’ll reconsider.

Student Loan Repayment

I’ve written a comprehensive article about How to Tackle Your Student Loan Debt; however, I want to point out a few more specific things for the purposes of this article.

  1. If you’re struggling to make ends meet, there are repayment plans that will ease any budgetary constraints you are experiencing. However, paying more on your loans will help you get out of debt faster. Even an extra $10 is better than a minimum payment.
  2. If you’re ballin, you might want to consider student loan refinance. You will pay a higher payment each month, but your loan will be paid off in a shorter period and you’ll save much more in interest over the life of the loan.

If you’re really ready to commit to paying off your student loans, I would like to share another resource available to you for purchase (this isn’t an affiliate link, just some good info I’ve had a chance to preview). My friend Zina at Debt Free After Three has created a Student Loan Knock Out Course that will provide you with a CRAZY amount of information on how to punch your student loans in the throat. I stand by the information presented and know you’ll find it useful if you know absolutely NOTHING about your student loan options. Be sure to check out The Student Loan Knock Out Course.

Income Diversification (Hustling)

Diversifying your income is an important aspect to consider because you should never depend on your full-time gig completely. People get laid off from their main jobs every day and if you’re lucky you’ll receive a severance or unemployment income. However, even those means of income eventually come to an end.

You won’t have to worry about that if you’re focused on building a steady stream of additional income to supplement your full-time job. Start with one side hustle and become really good at it. Find a way to put it on autopilot and then go out and create yourself another stream of income.

For example, if you start a graphic design company online that designs websites for bloggers, you might consider diversifying your income by providing consultation services. Another stream of income you can create is selling pre-made blog templates using an online shop (Note: this idea would be considered passive income if you do it once and continue to make money off it). Once that’s up and running, you might start a blog (that can later be monetized) where you share your expertise with other bloggers on how to DIY their own blog design.

The resources to help you start your own side hustles are endless!  I’ve written a review on Hustle Away Debt, by David Carlson that you can read here. David writes at Young Adult Money and his website provides a ton of information about side hustles (online and offline). Between his website and his book, I’m positive you can come up with an idea on how to diversify your income.

A few more sites I love to peruse that cover side hustling are Budgets are Sexy and Side Hustle Nation.

Improve Your Personal Finance Knowledge

Last, but most importantly, you have got to stay on top of your financial knowledge. The best way to manage your money is to continue learning about how to manage your money. That’s a mouthful, I know, but it’s true.

You don’t have to commit a ton of time to learning something new about personal finance. I’ve made an effort to read at least one personal finance book a month to further expand my knowledge. You may opt to take a free retirement class (or two) through your employer. Or you may opt to stay in the know about money related topics through news articles, blogs, or magazines.

Whatever method you choose, be consistent. Always learn something about how to better prepare yourself financially. You may think you’re young now, but I’m here to tell you, life will fly by quicker than you think. You’ll wake up one morning in your mid-thirties (if you’re not already there) and wonder where the time has gone. Use your time wisely and make smart money choices starting now!

I’ll end this with a few good reads. Here are a few books I recommend you check out if you’re just getting started in the personal finance arena (and yes, I’ve read them all and they are good):

I Will Teach You To Be RichRamit Sethi

You’re So MoneyFarmoosh Torabi

The Wealth Cure: Putting Money Back in It’s Place – Hill Harper

So my personal finance folks, what advice do you have to give these lovely graduates?

Graduates, grab your guide to personal finance checklist below!

You've made it! It's finally time to graduate into a job, bills, and debt (if you weren't so lucky). Now more than ever, you need to get a grip on your personal finances and I've created a guide to help you with several aspects I wish someone had helped me with after graduating. Pin this now! You need to read this!

 

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Drop your email in the box and get your College Graduate’s Guide to Personal Finance checklist!

 

*Part of Financially Savvy Saturdays on brokeGIRLrich and, Disease called Debt

Latoya Scott
CFEI/Social Entrepreneur
Latoya Scott is a Certified Financial Education Instructor and personal finance writer with a mission to help millennials learn how to stop living paycheck to paycheck so they can become financially carefree.

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  • Bill @ The Money Professors May 14, 2016 at 1:34 pm

    I have to say that understanding your paycheck – realistically is a big deal – so spot on there! There is a difference between making ‘$36,000 per year’ and receiving a paycheck every two weeks for $950 (after taxes, insurance, etc.). I would say graduates need to set goals. Once goals are set then they can prioritize where they want to spend their money and justify why they are willing to give up certain things – so they can meet their goals!
    Bill @ The Money Professors recently posted…The 7 Steps for College Grads to Get a JobMy Profile

    • Latoya Scott May 14, 2016 at 10:39 pm

      I agree, Bill! And that was one of those pills that was a tough one to swallow when you’re fresh out of college and realizing how there is so much “adulting” that needs to be done on so little money. You think your salary is enough until you realize what you bring home.

  • Apathy Ends May 14, 2016 at 11:54 pm

    Great post for the new 2016 personal finance class (recent grads) – information like this needs to be handed out at graduation!

    I would add The Automatic Millionaire to the list of books!
    Apathy Ends recently posted…Happy Hour Reads and Beer of the Week – 2My Profile

  • Mrs. CTC May 15, 2016 at 6:04 am

    This is so cool Latoya, I wish I learned all this stuff earlier on! I knew about spending little, but I always viewed money as an obstacle rather than a possibility to create the life you want.

    I would therefore advise to visualize your wildest dreams and use all the tools you describe to get there. Personal finance is not boring, it’s about taking control. Oh and side hustling indeed, nobody tells you about that in college.
    Mrs. CTC recently posted…Friday Frugal Confession: I’ve Been Buying Lunch at WorkMy Profile

    • Latoya S May 15, 2016 at 10:07 pm

      Yeah, side hustling is like the holy grail that no one ever talked about. It definitely should be discussed.

  • Aliyyah @RichAndHappyBlog May 15, 2016 at 6:42 pm

    This is such a comprehensive guide! I also use Personal Capital and Capital One 360. I think using the free tools available for personal finance will help recent college graduates, like myself, a lot.
    Aliyyah @RichAndHappyBlog recently posted…The Relationship Between Personal Finance And Personal DevelopmentMy Profile

    • Latoya S May 15, 2016 at 10:08 pm

      Hey Aliyyah, I agree! There’s no need in spending money when you don’t have to.

  • Mel @ brokeGIRLrich May 15, 2016 at 10:59 pm

    This is all terrific! I’m sending this to a bunch of cousins who are graduating this year!
    Mel @ brokeGIRLrich recently posted…Financially Savvy Saturdays #142My Profile

    • Latoya S May 15, 2016 at 11:00 pm

      Thanks, girl! I appreciate it!

  • Jen @ Frugal Millennial May 18, 2016 at 9:36 pm

    I can definitely relate to what you said about how if you had known 10 years ago what you know now, you’d be further ahead financially. I wish I hadn’t taken on student loans, and I hope I can inspire high school students to consider other options.
    Jen @ Frugal Millennial recently posted…Why I’m Breaking My Three Year Spending BanMy Profile

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