Graduating with a degree is such a huge accomplishment; finally out in the working world making a steady paycheck and ready to move up in the world. Most recent grads will be receiving a paycheck larger than they have ever received in the past and that is where many issues begin.
In many cases, when individuals start making more money, they are inclined to spend more money. Ready to show off their newfound wealth to the world, they often buy expensive things all at once: house, car, vacations, etc. without understanding the consequences.
While having more money may seem as though you are wealthier, examining your spending habits is the way to determine if you are actually wealthy or not. This may seem confusing, but it’s actually pretty easy to see once you do a money audit and can see exactly where your money is going.
There are several spending mistakes recent grads make which we will go over below.
Spending above your means.
This is a huge culprit when it comes to an increase in income. Many believe that because their income increase, they can afford to spend more money. Look at it this way: you made $10 a week and spent $5 a week. Now you make $15 a week and decide to spend more so you spend $10 a week. In both these scenarios, you are left with $5 which is barely enough to cover your weekly expenses. In this case, you are not really saving. That extra $5 is often spent because it’s only $5, it is not worth saving so might as well spend it. In both situations, you are not accumulating wealth thus even though you make more, you are not wealthier.
Spending above your means is a common problem for many but they have to realize, the more money they make, the more they should be setting aside for investments or savings.
Buying an expensive home and/or a new car
When you are finally out in the working world, especially after having the independence of college, of course you want to move out and get your own place. Starting out is not easy and the expenses pile up before you realize how much they add up to be. Having student loans, credit card debt, other types of debt, and now a mortgage, your paycheck dries up quickly and you’ll find yourself with nothing left over.
Another reason to move out is job relocation. Many jobs are located in big cities where the housing is really expensive. Instead of moving to the outskirts of the city where housing is cheaper or finding a roommate to cover some of the rent, recent grads often spend more money than intended so that they can be close to the job or live on their own. Spending outside of their budget can consume a large portion of their paycheck which leaves them living paycheck to paycheck or in debt.
On a similar note, aside from a few exceptions, most college students have an older car. Once they graduate and start working full time, their first big purchase is likely to be a new car. New cars can be very expensive but to the grads, it is about showing off their new lifestyle. Since everyone is buying new cars and houses, you feel obligated to do so just to keep up with your peers despite the consequences. Even if your current car still works, you feel compelled to buy a new one to feel as though you are not falling behind your peers. The irony in this: the people who save their money instead of overindulging, are often the ones who become successful because they are not tied down to mounds of debt.
Failing to consider all your debt
Once you have graduated, you forget about school and typically, student loan payments start kicking in. When you finance large purchases such as a house or a vehicle, each purchase is separate and while you think you think you can afford each individual item, when you put all the expenses, it becomes unaffordable. Now the individual has a car payment, mortgage payment, credit card payment and now their student loans. For almost any individual starting out, these debts can be overwhelming and has the potential to prevent you from getting ahead on your finances.
In order to help prevent drowning in debt, consider all debts before considering potential debts so you can factor in your monthly expenses to ensure if you can afford a new debt. Just starting out, it is not necessary to buy a car or even a brand-new car. This holds true for housing as well. Get yourself established and saving before you take on huge expense.
To tie into the unnecessary spending and debt habits discussed above, many recent grads assume that they have their whole life to work so they should spend their money now and save it later. This is a dangerous way to approach life because saving gets put on the back burner and never taken off. Because of this, many individuals are living paycheck to paycheck. They are unable to accumulate savings and invest it. Even if it is a small amount set aside from every paycheck, that small amount adds up over time. Develop the habit from the start and you will thank yourself later.
Not considering retirement
This was a topic discussed in a previous article on the blog so this section will be an overview. This is similar to saving: even small amounts add up. Time is in your favor and the more time you spend saving up for your retirement, the more money you will generate. Also, many employers will match your retirement savings thus the more money you save, the more money they will match. Why would you pass up this opportunity?
Moral of the story
Being aware of all the common mistakes recent grads make is the first step to getting ahead of your finances and not falling into the debt blackhole. Talk to a financial advisor to ensure that your anticipated purchases are affordable for your income and budget. Establishing a budget can keep you on track with your finances; this can give you the ability to make bigger purchases such as your dream home or a new car, without floundering in debt.
Talk to Adam Hogue, a CERTIFIED FINANCIAL PLANNER™ to help you manage your finances after graduation.