Managing Your Finances After Graduation | By Guest Author: Linda Stern, Licensed Insolvency Trustee
Finances After Graduation
Congratulations, you have graduated! Hopefully, the lifetime of studying, cramming and sitting for exams has paid off with a job at the end of the line. The thrill of a pay cheque sets most young adults on a path to financial freedom. Invariably, this will bring you to a financial fork in the road. You can pitch away at a long-term pursuit for consistent net worth growth. Or you can develop a false sense of security about your earning potential and walk down a path of overspending and accumulating debt. As you enter a time of having access to more money than you have ever had in your life, let’s have a discussion about how to best manage your finances after graduation.
Successful businesses go by the mantra “What gets measured gets managed“. This famous proverb can also apply to personal finances. To manage your finances after graduation, the easiest way to visualize your spending against your income is to create a budget.
Budgeting gives you perspective for controlling spending habits. For example, a daily gourmet cup of coffee en-route to work may only cost $5. But totalling it up to a week makes it $25, to a month, $100 and to a year, a whopping $1,200! When cost control becomes an issue, you will find considerable savings in your discretionary spending, like this one. It is rather difficult to understand the journey of your money, in and out of your bank account, without budgeting.
Tools for Creating a Budget
You can set up a basic budget quickly using an Excel spreadsheet. There are many free smartphone apps available to help you track your expenses on the fly. And the Financial Consumer Agency of Canada offers this free budget calculator on their website.
If you require professional help to get started, then book a session with a credit counsellor. For a modest fee, they set you up with all the tools and resources to create your budget. Furthermore, they guide you with strategies to monitor and manage your spending.
Budgeting is the first step in any debt management program. However, you don’t need to be in financial trouble to seek out this service. Learning proper budgeting habits will ensure you take the correct turn at the forked road described above. Getting into this habit early in life with your finances after graduation will help get you off on a good start.
Finances After Graduation: Housing
After years of bunking with roommates, you may be tempted to branch out and get your own living place. If so, keep in mind that housing is usually the largest piece of the pie in most budgets. It will take up 30%-35% of your budget, sometimes higher, if you work in an urban centre and prefer to live close to work to cut back on commuting.
With a steady salary, you could afford the luxury of your own apartment. Before you sign a long-term rental lease, consider job security as well as employment changes. Today, most young adults expect to move upwards and onwards into new positions every two years.
In fact, employers are increasingly offering temporary and contract work. Such jobs make your income flow unsteady yet rent is due each month. In this event, consider your housing options very carefully so you do not end up house poor with a very large part of your income going towards your housing costs. Fortunate individuals may have the opportunity of living with parents to avoid or reduce rent expenses. Others, however, will simply have to reconcile with roommates for a little while longer to keep housing costs to a minimum.
Paying Down Debt
If you have developed a proper budget, then any money left after expenses should go toward paying down the debt you accumulated during your schooling. Your student loans should be at the top of this list. In Ontario, the government has very specific guidelines for paying back this loan. Creditors will not easily forgive it, even after you declare bankruptcy.
You should also address credit card debt. Pay down debts with the highest interest rate, first. You can employ many strategies to do this, including transferring balances and snowballing.
If your credit card debt has become unmanageable, then this represents the biggest challenge with your finances after graduation. You must seek out credit counselling with urgency. You do not want to start your formative financial years with this problem festering for the long term. It will affect your credit score and present more problems than you need in everyday life.
Everyone should have funds set aside for emergencies to cover 3 – 6 months of living expenses. You can accumulate this gradually by saving 5% – 10% of your income each month. These funds should be free of market risk and easily accessible.
Saving for an emergency is much easier early in life. It becomes difficult after you start growing deeper and more expensive life roots, like purchasing your first home or having children. This exercise should, therefore, be an integral component of any financial plan for young adults.
The main problem with emergency funds is deciding where to save this money. Investing it in stocks would allow the money to work and grow for you. However, astute financial advisors do not recommend this strategy specifically for emergency funds. The stock market is volatile. During a market downturn, your emergency fund could have no value at the exact time that you need to access it.
At the other end of the spectrum is a regular bank account where the funds sit around and earn nothing. To keep up with inflation, this cash should grow at least 2% – 3% or it loses value. Ask your bank about high yield savings accounts. Ensure you understand all the rules for minimum balances and service charges before you open one.
Trusted Financial Advice
This is also the right time to seek trusted financial advice. A financial advisor can help you set long term goals and guide you with strategies to achieve them.
This person could certainly be a parent or relative, if they have demonstrated a good history of managing his or her finances. When seeking professional help, start out with a word of mouth referral from your immediate circle. Financial planners and advisors come with different designations and they can perform different tasks. You should meet with each candidate in person to vet their ability to meet your needs. Pay attention to the questions they ask. They must understand your situation and develop plans that work with your goals. Most importantly, you should feel comfortable entering into a relationship with your advisor for the long-term.
Once you select your advisor, ensure you stay in touch at least once a year. Your financial planner should keep your financial goals in line with your life circumstances, as you mature.
Your financial planner will likely advise you about life insurance as a solid foundation for all financial plans. Young adults almost never consider this matter without being prompted. Why would end of life issues ever be important when you are in the prime of your life? The fact is, the best time to purchase life insurance is when you are young and healthy.
If anything happens to you, life insurance can help pay for your student loan and debts without burdening those left behind. If you register your first mortgate with a spouse, life insurance is often cheaper than mortgage insurance. It will allow your spouse the means to continue living in the home instead of selling it. And without doubt, life insurance becomes extremely important after you have children. The earlier you purchase it, the lower your premiums will be. And insurers usually guarantee them for life.
Once your debt repayments and emergency fund savings are managed, you will have cash available for other types of savings. Short term goals could include saving for an annual vacation, for example. And your financial advisor can guide you with long term savings, such as a down payment for a home or a comfortable retirement.
If your employer offers matching retirement contributions as a benefit, sign up for them to the maximum. This is free money! While few people stand to accumulate wealth in single chunks from trust funds and inheritances, most of us will grow our wealth in small increments, over time. When properly managed, you can expect your investments to grow via compounding interest rates and dividends.
The Side Gig
A “side gig” will allow you to earn extra income by tutoring, freelancing, craftsmanship, babysitting, dogwalking, etc. New graduates, especially those without young children, have the time, energy and enthusiasm to turn a hobby into a manageable small venture on the side. Many young adults find this to be an enriching experience. Your accountant can best advise you about legally setting up a business and the options available to write off portions of your living expenses, like rent, car lease and utilities, as business expenses.
As you stand poised to enter your best income earning years, adopt healthy habits with your finances after graduation. These include living within your means, using credit wisely and paying your bills on time. As you graduate financially into making large purchases, like a car, home or investment property, financial institutions will judge you by the value of your credit score. Following these habits will allow you to build a healthy credit reputation, which in turn, will serve you well for the rest of your life
Linda Stern, a Licensed Insolvency Trustee, is a guest blogger for Family and Credit Counselling Services, a blended not-for profit community-based agency offering debt counselling & management as well as family/individual support services within York region.