Every year millions of students enroll in college. These young adults are largely confined in the relatively safe, secure and structured environment that is academia, but new life lessons are learned, as students transition into the real world. How graduates approach financial planning in the first few years after college can set the tone for their financial habits down the road. By adhering to a strategy and plan, recent college graduates can avoid mistakes in how they deal with their personal finances.
Real World Lesson #1: Plan to Save
After graduates celebrate their conquest of college term papers, exams and theses, a large chunk of them take whatever jobs they can find. Some are disciplined enough to pursue the right field for them. However, recent grads too often find the traditional workplace routine unfulfilling or unchallenging. Unreasonable spending habits often take over as an escape from the daily grind, and entire paychecks are spent on regular expenses (such as rent and utilities), purchases (such as an automobile and furniture) and luxury items (such as travel and an oversized television).
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Although you should enjoy your newfound freedom, you should also strive to save a nice portion of your paychecks. The recurring cash flow can be placed in a combination of stock, bond and money market investments. Once you are no longer living in the comfort of your parents' home, it is prudent to plan for contingencies, such as automobile accidents, personal injury, lay-offs and other unforeseen expenses.
Real World Lesson #2: Money Spent Is Money Lost
Having been broke for four years or so while in college, recent graduates naturally equate a steady paycheck with newfound wealth. No longer subject to the disagreeable taste of dorm food and late-night snacking on hot noodles, young adults easily form a new habit of transforming their recurring income into regular dining at upscale restaurants, bars and clubs.
In the real world, assets either appreciate or depreciate. The purchase of a car is the purchase of a depreciating asset because the car diminishes in value as soon as it leaves the lot. The same is true for furniture, clothing and expansive television screens.
Several factors can help create real financial security:
The performance of assets that appreciate over time, such as blue-chip stocks, dividend-yielding bonds and homes.
Investing in yourself as a professional to improve your prospects for growth and increased income. By investing money each month to improve your performance in your chosen field, you can expect to earn more promotions and higher pay over the long run than your complacent counterparts. These personal investments can take the form of training, online classes, industry certifications, books and seminars.
In a dynamic and competitive marketplace, paychecks provide only the illusion of security; it's how you use your paychecks that determines your financial well-being.
Read: The 10 Commandments of Investing
Real World Lesson #3: Control Debt Before It Controls You
Depreciating assets and reckless spending often lead to only one thing: debt. Debt devours your cash flow and negates your assets, skewing your personal net worth toward the negative side. Set time lines for eliminating your various debts, including school, car, credit card and home loans. Pay off the debts with the highest interest rates first—that's just common sense.
There is good debt; you can use other people's money to buy appreciating assets, essentially using other people's money to make money for yourself. That's how the private equity people do it. But the rule of thumb is to discipline yourself in executing your plan of attack. Kill the debt beast, whatever its form, by a certain deadline.
Read: How To Invest When You're Deep In Debt
Real World Lesson #4: Become a Good Credit Risk
Paychecks are vulnerable to being reduced or cut off altogether. In Lesson No. 3, we point out that if poor habits and consumption behaviors are not kept in check, debt can be financially disastrous. However, large transactions do exist that necessitate the use of debt—the wheels of the economy would grind to a halt if consumers had to bring in sacks of cash in order to pay the full value of a car or home up front. That's where credit comes in.
Manageable debt, as a means of establishing a good credit history and acquiring appreciating assets, helps recent grads become financially credible to lenders when it is time to take out an auto loan or mortgage. Additionally, extenuating circumstances may require a recent graduate to take out an emergency loan. Manageable debt means that payments and the principal balance are easily affordable and that there is a target time line for eventual pay-off.
Read: Trick Yourself Into Saving
Real World Lesson #5: Face Facts - Get Life Insurance
Death is stressful and expensive for survivors. Lack of foresight and planning can lead to financial distress for your family members. Life insurance can help alleviate much of this stress at a critical time.
The Bottom Line
Personal finance is a critical area for your mental and emotional well-being. As a student, IQ, grades, standardized test scores, popularity ratings and tolerance for alcohol are the benchmarks against which your teachers and peers judged your success. Once you graduate, personal finance should become one of your dominant priorities.
Unfortunately, the educational system—while providing interesting theories and insights on the universe—provides little in the way of real-world preparation for students in the areas of personal finance, workplace challenges or life's other adversities. A strong personal balance sheet and income statement will go a long way in helping you to overcome these challenges and maybe even find new and exciting opportunities to increase your net worth.
5 money mistakes new graduates must avoidSavvy Living – Mon, Sep 24, 2012 7:04 PM PHT
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