Graduating from college and entering the real world is an exciting time that includes a wealth of new opportunities. But a full-time job and added expenses also provide the opportunity to make some serious financial mistakes that can haunt you for years. That's why it's important to identify common money mistakes and then work to avoid them.
These are top five financial mistakes new grads make and how you can avoid them:
Approximately two-thirds of students in the US take out student loans, with the average graduate carrying just over $26,000 in debt by graduation. Mismanaging your student loans by not paying on time or not taking advantage of relief programs can cost you.
To stay in control of your student loans, make sure you know exactly when you must begin making payments. Many federal and private loans allow a grace period after graduation before you have to stay repaying. If you’re having trouble making payments, contact your lender and find out your options. Federal loans, for example, offer hardship deferments or income-based repayment.
Starting out can be expensive. Many new grads move to a new city, furnish a new apartment, and build up a more professional wardrobe for work. These costs can add up quickly, making it easy to take on too much debt.
Maxing out credit cards or opening up new lines of credit can backfire quickly. In addition to lowering your credit score, carrying a balance on your cards means costly interest payments. Avoid the temptation to take on new debt by saving so you can pay cash.
On the flip side, not establishing a credit history can have a negative effect on your credit as well. If you’ve manage to graduate without debt, congratulations. But no debt at all can actually keep you from obtaining credit at all. The length of your credit history comprises 15% of your FICO score (the scoring model many lenders and creditors use), so it’s important to establish some credit.
Opening a credit card is the easiest way to begin establishing credit. If you pay off the balance each month, it will have a positive effect on your credit and you can avoid accruing interest.
Leaving the life of a student behind for the real world brings new expenses many new grads have never dealt with before. Utilities, student loan payments, and transportation costs can quickly eat away at your paychecks, leaving you with little leftover. As a result, many new grads neglect savings altogether.
Instead of living paycheck-to-paycheck, make it a point to live within your means and devote a portion of your paycheck each month to savings. This will serve as a cushion for unexpected expenses and emergencies.
Ideally, we’d all have the job (and salary!) of our dreams right after graduation. However, a sluggish economy and record high unemployment rates mean many new grads may be underemployed or still searching for a job after graduating. That’s why it’s smart to consider creative ways to save money. This can include taking on roommates or moving back in with parents or relatives after graduating.
Before you immediately dismiss the idea of living with your parents after graduating, consider this—one recent study found that a whopping 45% of college graduates aged 18-24 lived with their parents (that number drops to just 41% for those 18-34). Moving back home temporarily or taking on roommates can help you save a fortune in living expenses.
Recent college graduates who budget their money, avoid taking on too much debt, and live within their means can avoid many of the financial problems new grads make.