Graduating from college is a significant milestone that often heralds a new set of financial responsibilities. As you enter adulthood, you're greeted by rent, bills, and possibly the looming specter of student debt repayment. Crafting a budget is essential to effectively managing your finances and steering towards financial independence.
In this article, we delve into the budgeting essentials for recent graduates, guiding them through the tumultuous seas of post-graduate life.
Assess Your Financial Situation
Before you dive into creating a budget, take a comprehensive look at your financial landscape. Determine your total income, accounting for your salary, any side hustles, and additional income streams. Subsequently, itemize your fixed monthly expenses, including rent, utilities, groceries, and transport costs.
Create a Proactive and Balanced Budget
Budgeting should be both proactive and balanced! Your budget should be an ultimate plan for how you want to use your money, not just a record of what you've already spent after a weekend out with friends.
If there were a financial redo button for those early years after graduating, it would be recommended to create a budget that includes necessary expenses, funds for those little extras that bring you joy, and then prioritizes paying off any debt like student loans or high-interest credit cards.
For most graduates, this stage of life will never be experienced again. The same type of time, freedom, or responsibility load will never be the same, so now is the time to focus on paying off these debts because it will greatly push you ahead financially in the long run! As your income grows and you knock out those debts, you can gradually allocate more for savings and fun adventures.
Vikki Zacchilli, Financial Coach and the Six-Figure CFO, Owner of Minted Mindset, Minted Mindset
Track Income and Organize Expenses
Begin by keeping track of your income and organizing your expenses into two categories: non-essential and essential. Essential expenses include things like rent or mortgage payments, utilities, groceries, and transportation. Non-essential expenses include eating out, entertainment, and discretionary spending. Assign a portion of your income to each category.
Prioritize the essential expenses first. It's important to be disciplined in sticking to your budget and regularly reviewing your spending habits to identify areas where you can cut back. By establishing a budget, you'll gain control over your finances, save for the future, and ensure that you live within your means as you navigate life after graduation.
Steven Light, EVP of E-commerce and Digital Solutions, Avenue B
Build an Emergency Fund
Financial emergencies can happen at any time, so it's essential to allocate a portion of your budget to an emergency fund. Aim to save at least three to six months' worth of living expenses in an easily accessible savings account. This will provide a safety net in case of unexpected events like medical bills or job loss.
Use the Envelope Budgeting Method
Divide the budget into envelopes for different expenses, like groceries and transportation. Only spend the allocated amount in each envelope. This visual method promotes awareness and discipline in managing expenses.
For example, a graduate can allocate $200 for groceries and $100 for transportation each month. They would fill separate envelopes with cash for these categories. When shopping for groceries, they would only use the money in the grocery envelope, avoiding overspending. This technique helps maintain a clear overview of expenses and encourages sticking to budget limits.
Roy Lau, Co-Founder, 28 Mortgage
Categorize Spending into Fixed and Variable
One helpful budgeting tip for graduates dealing with various expenses is to categorize spending into "fixed" and "variable" costs. Fixed costs, like rent, utilities, and loan payments, remain consistent monthly. Variable costs, such as dining out, entertainment, and shopping, can fluctuate. Prioritize budgeting for fixed costs to ensure your essential needs are met.
Then, allocate a reasonable portion of your income to variable expenses, allowing for some flexibility without overspending. This approach helps you maintain control over your finances as you adjust to post-graduate life.
Jay Toy, General Manager, 88stacks
Adopt the 50/30/20 Budgeting Rule
Adopting the 50/30/20 rule is an indispensable budgeting tip for graduates. Allocate 50% of your income to necessities, such as rent, groceries, and utilities; 30% to desires, like restaurants and amusement; and 20% to savings and debt repayment, including student loans and credit card debt.
Prioritizing necessities ensures that essential expenses are covered. The 30% for wants enables you to appreciate life without exceeding your budget. Last, allocating 20% of your income to savings and debt reduction puts you on the path to financial security.
Remember to alter these percentages as your income increases to accelerate savings and debt reduction. This strategy provides the borrower with a clear framework for managing diverse expenses, avoiding excess, and establishing a solid financial foundation as a graduate.
Jessica Shee, Senior Tech Editor and Marketing Content Manager, iBoysoft
Prioritize Needs Over Wants
A crucial budgeting tip for graduates is to prioritize needs over wants when managing various types of expenses. This principle, often referred to as "essential vs. non-essential spending," can be a game-changer in achieving financial stability. Here's how to implement it effectively:
Start by categorizing your expenses into two groups: needs and wants. Needs include essential costs like rent or mortgage, utilities, groceries, transportation, and insurance. Wants to encompass non-essential expenses like dining out, entertainment, subscriptions, and luxury items.
Then, allocate a significant portion of your budget to cover your needs, ensuring you have enough to cover these essential expenses comfortably. For instance, aim for housing costs to be around 30% of your income.
Finally, assign a reasonable portion of your budget to wants. This step requires discipline and self-control.
Sai Blackbyrn, CEO, Coach Foundation
Allocate Income to a Savings Account
For recent graduates navigating various expenses, one effective budgeting tip is to allocate a portion of your income to a dedicated savings account that isn't easily accessible.
Initially, this might pose a slight challenge, as you won't have immediate access to these funds for day-to-day expenses. However, as you consistently save over several months, you'll accumulate a substantial amount that can be earmarked for significant and essential investments, such as a down payment on a house or a car. This prudent financial approach alleviates the need to take out loans for substantial expenses, saving you from added debt and interest payments in the long run.
Furthermore, it's an excellent way to cultivate the habit of delayed gratification, as you are learning the value of patience and the rewards it brings. This discipline can positively influence other aspects of your financial life, such as reducing impulse spending and encouraging thoughtful financial planning.
Prioritize Student Loan Payments
The current student loan system is such that it doesn't allow graduates to breathe easily. If you have federal student loans or private student loan debt, they should be a top priority in your budget. Determine the minimum monthly payment required and allocate this amount to your budget. However, if you can afford to pay more, consider doing so to accelerate your debt repayment process and reduce interest costs over time.
Investigate the various student loan debt relief options available to borrowers, such as Income-Driven Repayment (IDR) plans, Extended Repayment, or Public Service Loan Forgiveness (PSLF) for those working in public service. These plans can make your monthly payments more manageable based on your income.
Explore loan forgiveness programs, such as Public Service Loan Forgiveness (PSLF), a program that can forgive your remaining loan balance after a specified number of qualifying payments if you work in public service.
Contact your student loan servicer to learn how to navigate the unaffordable student loan system.
Additional Tips for Recent Graduates
In addition to these budgeting basics, here are some extra tips to help recent graduates manage their finances effectively:
- Minimize Credit Card Debt: Avoid accumulating high-interest credit card debt. Pay off your credit card balances in full each month to prevent interest charges.
- Explore Income Boosters: Find opportunities to increase your income, such as part-time work, freelancing, or side hustles. The additional income can help you build savings and pay down debt more quickly.
- Negotiate Bills: Be proactive in negotiating bills and expenses. This can include negotiating your rent, exploring student loan repayment options, or seeking discounts on subscriptions and services.
- Set Specific Goals: Establish clear and achievable financial goals. Having a target, whether it's saving a certain amount or paying off a specific debt, provides motivation and direction.
- Network and Learn: Connect with mentors or financial advisors who can provide guidance and share their experiences. Learning from others can help you make informed decisions and avoid common financial pitfalls.
With proper help you can
- Lower your monthly payments
- Reduce credit card interest rates
- Waive late fees
- Reduce collection calls
- Avoid bankruptcy
- Have only one monthly payment