Top 5 Financial Moves for New Graduates
Congratulations, new graduates! You’ve walked across the stage, received your diploma, and now you're about to embark on your first full-time job. This is a monumental step, and with it comes the responsibility of managing your finances wisely.
Here are the top five financial steps to ensure you start your post-graduate life on the right financial footing.
1. Create a Spending Plan (aka Budget)
Image source: Unsplash, author Chichi Onyekanne
The first step towards financial stability is creating a Spending Pla – aka budget.
A Spending Plan helps you understand your income, expenses, and helps you to allocate your hard earned money effectively. By allocating your money you are able to understand exactly where you money is going. Start by listing your net income (after taxes) and all your anticipated expenses, including rent, utilities, groceries, transportation, student loan payments, and discretionary spending.
Tips for Effective Budgeting:
Use the 20/50/20/20 Rule: First of all, YOU get paid first. Try to allocate 20% to savings/investing. Then you allocate 50% of your income to Essentials (rent, utilities, groceries), 20% goes to debt repayments and 10% is for fun (entertainment, dining out, clothes).
Track Your Spending: Use apps like YNAB (You Need A Budget), or check out the simple spreadsheet from Bacon & Heels to monitor your spending habits.
Adjust as Needed: Your first few months might require adjustments as you get a clearer picture of your expenses so don’t feel bad if you find yourself adjusting often for the first 3-6 months.
2. Build an Emergency Fund
An emergency fund (aka a rainy day fund) is a your financial safety net that covers unexpected expenses, such as medical bills, car repairs, or a sudden job loss. Aim to save at least three to six months’ worth of living expenses.
I know that is a lot, so start with putting aside $50 each time you get paid, when you have a better handle on your monthly expenses then you can also adjust the amount you can place aside for emergencies.
This cash should be easy to access so look to a high yield saving account so that this money is making a bit of money while in this account.
How to Build Your Emergency Fund:
Start Small: If saving three to six months’ worth seems daunting, start with a goal of $500 to $1,000 and gradually increase it.
Automate Savings: Set up automatic transfers from your checking account to a high-yield savings account to ensure consistent contributions.
Reduce Non-Essential Spending: Temporarily cut back on discretionary spending and redirect those funds to your emergency savings.
3. Pay Down Debt
If you have student loans or credit card debt, prioritize paying them down. High-interest debt (the current average interest rate of credit cards is 21.99%!), in particular, can be a significant financial burden.
Here’s how to tackle Debt Repayment:
Avalanche Method: This method of repayment focuses on paying off high-interest debts first while making minimum payments on others.
Snowball Method: This is when you pay off your smallest debts first to gain momentum and motivation, then tackle larger ones.
Consider Refinancing: Look into refinancing your student loans for a lower interest rate, which can save you money over time.
4. Start Investing for Retirement
It might seem too early to think about retirement, but starting now can have a significant impact due to the power of compound interest. If your employer offers a 401(k), a Registered Retirement Savings Plan (RRSP) or similar retirement plan, take advantage of it, especially if they provide a matching contribution.
Retirement Investment Tips:
Contribute Enough to Get the Employer Match: This is essentially free money, so don’t leave it on the table.
Consider a Roth IRA or a TFSA: If you don’t have access to an employer-sponsored plan or want additional savings, a Roth IRA allows your contributions to grow tax-free. A TFSA allows your contributions to grow tax-free and can be used for any purpose, including retirement.
Automate Contributions: Set up automatic contributions to your retirement accounts to ensure consistent saving.
5. Educate Yourself About Personal Finance
Financial literacy is an invaluable tool that will serve you throughout your life. Take the time to educate yourself about various aspects of personal finance, including budgeting, investing, taxes, and credit management.
Resources for Financial Education:
Books: Start with classics like "Rich Dad Poor Dad" by Robert Kiyosaki, and “ The Automatic Millionaire” by David Bach.
Podcasts: Listen to personal finance podcasts like "The Dave Ramsey Show," "ChooseFI," and "How to Money."
Bloggers: Follow Bacon & Heels for tools, information and actionable personal finance topics :-)
The Bottom Line
Starting your first full-time job is an exciting milestone, and how you manage your finances now will set the tone for your future financial health. By creating a budget, building an emergency fund, paying down debt, investing for retirement, and educating yourself about personal finance, you’ll be well on your way to achieving financial stability and success.
Remember, financial habits formed early in your career can have a lasting impact. Stay disciplined, be patient, and don’t be afraid to seek advice when needed. Here’s to a prosperous and financially secure future!