Congratulations to all the recent graduates! To honor those who have worked hard to accomplish this great achievement, we’re sharing 7 money tips to help them build a solid financial foundation for their life. If you’re not a recent grad, that’s ok, these tips can help you too!
7 TIPS FOR COLLEGE GRADS TO MANAGE MONEY SUCCESSFULLY
1. Create your own bank accounts.
2. Create your Stability Fund
3. Crush your student loans.
4. Calibrate your credit.
5. Clear out toxic debts.
6. Consider your future home.
7. Choose your investing strategy.
1. CREATE YOUR OWN BANK ACCOUNTS.
One of the first things you should do after graduating is make sure you have great checking and savings accounts.
You don’t want to keep your co-accounts which you probably opened with your parents, it’s time to get out on your own. You may want to rethink which bank you’ll want to have a long relationship with.
Bank accounts lay a foundation for your money management system, so they need to give you lots of benefits. Look for a bank or credit union that offers
No monthly fees
Interest earning checking and savings accounts
A great mobile app
Easy transfers options
Free bill pay, and
Working with a local credit union can be a great choice! If you have access to USAA (active and former military and eligible family members), there can be some major benefits to working with them, from insurance discounts to good savings rates, and great online service.
2. CREATE YOUR STABILITY FUND
We recently did an episode about the “4 Financial Steps to Purposeful Living”. Starting a stability fund was number 2!
Save before you spend - We always recommend that you, “Save before you spend...so you experience stability today and in the future.”
1. 1 Month of Living Expenses in Stability Fund (bare minimum)
1 month of living expenses will get you through most emergencies or expenses that are beyond your normal monthly budget expenses.
2. Continue $150 into savings (any increment of $50 based on income).
Should I be saving or paying off debt? Both … always need to grow the habit of saving.
3. 3-6 Month Stability Fund
A smooth transition from one season to the next (job loss, medical emergency, maternity leave, other budgeted items in excess).
Think of the stability fund as an investment in yourself. It’s how you’ll stay calm and cool in the face of a potential crisis like losing your job.
3. CRUSH YOUR STUDENT LOANS
1. MAKE ACCELERATED LOAN PAYMENTS.
If you get paid every two weeks, a great strategy to knock out your student loans faster is to make accelerated or biweekly payments instead of monthly payments. There are 52 weeks in a year, not 48. So it’s a sneaky way to get the equivalent of one extra monthly payment made each year.
2. PAY MORE THAN THE MINIMUM.
The longer you take to pay off the loan the more it will cost you in interest. It’s best to pay as much as you can from the start. Start with paying at least more than the minimum payment.
Example: If you owe $50,000 at a 5 percent interest rate for 10 years.
Your minimum payment would be $53
You’ll pay $14,000 in interest over the life of the loan.
If you pay an additional $100 each month you’ll save about $3,000 in interest and pay off the loan two years earlier.
When you send more than the minimum payment or make biweekly payments, make sure that you add a note to your payment indicating that you want the extra to go toward your principal balance. Otherwise, the lender may think that you’re prepaying the next month’s payment and simply hold it or apply it toward a credit, which won’t help you get rid of the debt any faster.
4. Calibrate your credit
How to Build Your Credit
Your Credit Score and Credit Report Matters
You may need to borrow for a major purchase (car, house, etc.) .
Without good credit you may not qualify.
With bad credit you’ll pay a premium.
Credit Score Overview: Information about you gets reported to one or more credit bureaus that maintain the data in your file, known as your credit report. Then companies who want to access your credit report pay the bureaus for your information.
Credit bureaus don’t make lending decisions; they just maintain your data. But credit reports are used by lenders who want a quick way to evaluate you. That’s why they were designed--to provide lenders a snapshot of your current credit worthiness.
Credit scoring model
Analyze the total amount of debt you owe on all your accounts.
Revolving accounts (credit cards), take in account the available credit vs. your utilization of that credit. This makes up about a third of your overall score.
As long as you make monthly minimum payments on time, your revolving accounts will remain open.
Installment loans, such as car loans and mortgages, are different because they don’t have a credit limit and do come with a set maturity or pay off date. When you pay down an installment loan to zero, the account is closed.
A key formula that’s used to calculate your credit scores is called your credit utilization ratio. It’s used only on revolving accounts. It’s a simple formula that compares your credit limits to your outstanding balances. This ratio shows how much available credit you’re using.
Example: if you have a credit card with a balance of $500 and a credit limit of $1,000, your utilization ratio is 50%.
Keeping a low utilization ratio, such as below 20%, is optimal for good credit. So, by paying down your balance on the card to $200, you could reduce your utilization ratio from 50% to 20% and boost your credit scores.
A low utilization ratio tells potential lenders and merchants that you’re using credit responsibly. A high ratio says you’re maxed out and may even be getting close to missing a payment. To maintain the best credit possible, never let your utilization ratio exceed 20% to 25%.
The utilization ratio is 30% of your score. Paying all your debts on time is 35% of the score.
As a new graduate, you may not have much credit history, which means you probably have no or low credit score. But don’t worry, it’s easy to build good credit over time.
High credit scores tell lenders and merchants that you’ve been responsible with money. A good credit history comes with privileges such as low interest rates on loans and credit cards, which can save you a bundle.
But low scores mean that you won’t qualify for credit or that it will be expensive. And poor credit can trip up other areas of your financial life even if you never borrow a dime.
Other Ways Credit Affects Your Finances
Besides reducing the interest you pay when you borrow, your credit affects many other aspects of your everyday life, even if you don’t borrow money! There are a variety of companies and industries that use credit to evaluate you, even though they’re not giving you a loan or a credit card.
Auto insurance - A few states have banned use of the credit score as a factor in auto insurance, but most allow insurers to look at your score and change your costs based on your score.
Home insurance - Just like with auto insurance, home insurers also use your credit when setting rates for home, condo, and renters policies.
Employment - Employers in most states have the right to check your credit reports, with your permission. The idea is that if you have a poor credit history, you might not be disciplined or responsible when handling money. Employers may fear that you have the potential to steal or that you’ll be distracted at work due to financial troubles and not offer you a job.
Leasing - Most landlords, property managers, and leasing companies check your credit as part of the application process to make sure you’re likely to pay rent on time. If you have poor credit you may get turned down to lease or have to pay a larger security deposit.
Cell phone contracts - Cell phone companies check your credit when you apply for a new contract to make sure you’ll pay their bill. If you have poor credit you may be charged higher rates, a higher security deposit, and not qualify for top-tier wireless plan offers.
Utilities - Credit also plays a big role in utilities, such as water, gas, power, and cable service. Applying for these services is applying for credit—so having poor credit makes it difficult to get them. You might have to pay a hefty security deposit, get someone with good credit to co-sign your application, or get a letter of guarantee from someone that says they’ll pay your utility bill if you don’t.
5. Clear out toxic debts
Once you have credit, it can be tempting to use too much of it.
Every new graduate needs to respect debt. It’s a powerful financial tool that can help you build wealth when used the right way. For instance, you can use low-interest debt to get an education so you earn more over your lifetime, or to buy a home that appreciates in value over time. But if you use high-interest consumer debt—such as credit cards and payday loans—to finance a lifestyle that you can’t afford, it can be devastating to your financial life.
To learn more about debt and how to eliminate it check out Episode 34-35