I don’t normally use guest posts, but I couldn’t pass up this terrific piece adapted from Kimberly Palmer’s U.S. News & World Report column. Palmer is the author of the excellent book, “Generation Earn.” Without further ado, the 7 biggest screw-ups:
This year’s college graduates face a particularly daunting array of financial challenges: Hefty student loan debt. A tough job market. Complicated financial options, from Roth IRAs to consolidating student loans.
It’s overwhelming, but not insurmountable. These seven mistakes and their solutions, adapted from my book Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back (generationearn.com), are designed to help college grads bypass common hiccups and take control of their financial lives.
1. Taking on too much debt – or not enough. Too much debt can weigh down recent grads, forcing them to spend more money on interest and fees than on fun and other goals. The new credit card regulations make it harder for anyone under the age of 21 without their own income to take out cards of their own, which could make post-graduation overspending even more tempting and as intoxicating as frat parties are to college freshmen.
At the same time, the recent recession has led many young people take the debt-is-bad message too literally. Avoiding loans altogether, however, can hurt college grads. Sometimes, student loans for graduate school or a mortgage are good investments. Being responsible for credit accounts also allows 20-somethings to build their credit history, which is required if one day they want to take out a mortgage, auto loan, or other type of loan.
The solution: Build your credit history slowly and steadily, by opening up accounts in your own name and then paying them off on time.
2. Becoming victim to rapid lifestyle inflation. You’re a recent college grad, so that means you probably need a new car, new apartment, new sofa, and a new… Wait a minute. Not only do you not need all those things, but you probably won’t appreciate them much, either. A little theory called the “hedonic treadmill” explains why. We adapt all too quickly to improvements in our lifestyle. That 60-inch television that you drooled over at Best Buy will soon start blending in with the rest of your furniture, along with your top-of-the-line coffee maker and pillow-top mattress.
The solution: Instead of using your first paycheck to make your new digs look like a sitcom set, spread out your purchases over time. Maybe you need a bed right away, but that embroidered duvet cover from Pottery Barn can wait.
3. Falling into bad money habits. Bi-weekly $20 happy hours, daily $15 lunches, and nightly take-out are just a few of the bad habits that eat into new grads’ bank accounts. While the occasional lapse isn’t a problem, repeatedly wasting money on a weekly basis for years will cost you big-time.
The solution: Learn to cook, by enlisting the help of friends, family members, or your favorite celebrity chef (via the Food Network). The habit can save you hundreds, if not thousands, of dollars a year, and turn your home into a popular destination for friends. It’s a skill that lasts a lifetime.
4. Waiting to save and invest. Sure, you don’t feel like you have an “extra” money yet, and you’re still getting used to seeing your name on a paycheck. But that makes it the perfect time to start saving at least one-quarter of your income [link] for your future goals, including retirement. The first priority is to establish an emergency savings account with at least three months of expenses that can get you through any unexpected bumps, from unemployment to a car accident. Then, start saving for retirement. If your employer offers any type of 401(k) matching program, take advantage of it – passing it up is like saying no to a pay increase. Then, open an after-tax savings account for your other goals, from traveling to homeownership.
The solution: If saving any money seems daunting, then start by funneling a modest 2 percent of your income into a high-yield saving account or money market fund. Then, slowly raise that percentage. Once you have your three-month emergency fund stored away, then consider investing a portion of your longer-term savings in low-fee index funds and other more aggressive investment vehicles.
5. Failing to negotiate for a higher salary. Even in this economy, employers expect some haggling over salary and benefits. In fact, doing so is a sign of professionalism shows that you, a recent college grad, understand how the working world works. A simple request after expressing enthusiasm and appreciation for the job offer can eventually lead to hundreds of thousands of dollars more in lifetime earnings. (Linda Babcock of Carnegie Mellon University calculates that not negotiating your first job offer can result in a loss of up to $1.5 million in lifetime earnings.)
The solution: Practice your job offer conversation in advance of receiving any potential offers so you’re ready to land a better deal and research your field ahead of time so you know what to expect. If the salary really is fixed, then consider focusing on other benefits, which can be worth as much as a third of the salary but job seekers often overlook. What are the health care benefits? Retirement account perks? Vacation days? Work-at-home flexibility? Decide what’s important to you and get ready for some professional haggling; it usually just takes one round of back-and-forth.
6. Thinking you’re done studying. Sure, you have your degree, but unless you attended one of the few schools that teach personal finance, you probably know relatively little about how to build wealth. That makes the post-graduation period the ideal time to take matters into your own hands.
The solution: Look for ways to learn more about smart personal finance strategies, and it doesn’t have to be boring. Dozens of blogs, websites, and books make learning about money fun, and many local community colleges and universities offer personal finance courses for local professionals. You might also want to consider forming a money club with friends, where you meet up once a month to talk about your money questions, goals, and research.
7) Getting buried in paperwork. There’s no avoiding the fact that being an adult comes with some secretarial duties. Suddenly, you have pay stubs, health insurance forms, tax documents, and credit card statements to keep organized. It’s easy to let them build up until you just want to shred the pile and toss it in the trash.
The solution: Take advantage of modern technology by going paperless whenever possible. Online accounts are easier to manage (and, bonus, better for the environment). New websites such as shoeboxed.com keep your receipts organized online, which is especially helpful at tax time. Mint.com makes it easy to track your spending and establish a budget.
The bottom line: Add “getting on top of your finances” to the list of things to do after graduation day – and try to make it as fun at least as fun as cleaning out your dorm room.