This is half of a two-part series on spending for new college grads. Click here for, "10 Ways Recent Grads Waste Money"
Soon more young people will have paychecks in their pockets than at any time since 2008. With the unemployment rate at 5.4% as of April -- 2.7% for degree holders -- for the first time in a long time people graduating from college this year are entering a job market that is stronger than the 40 year average. Recent grads’ slightly older peers faced dismal job prospects that lingered through last year (though particularly hard hit were those who graduated in 2009 and 2010). As a result of the lousy job market and massive student debt loads, Millennials have been notoriously reluctant to part with the money they manage to earn. Many have avoided stocks, cars, houses and marriage.
This year’s grads have less reason to worry and may therefore be more willing to spend. This is good news but could work against your personal financial situation if you are not smart about what you buy and how. “If all of a sudden you are making more money than you are accustomed to having often it just gets absorbed into lifestyle,” points out Chantel Bonneau, a 26 year-old financial planner with Northwestern Mutual. You dine out a lot. You take little weekend trip. You shop online. “It adds up because you had this extra money. But when life gets real and you want to save for home, a wedding, retirement you’ll need to cut back. That can be hard for someone who got used to take out four nights a week.”
Some things really are worth spending on – as long as you go about it in the right way.
Spend on the thing that is most important to you. To begin remember that you are allowed to have fun. The key is to determine what indulgence brings you the most value. Maybe you workout six days a week and feel it is important to belong to a quality gym. Maybe you love having fresh cut flowers on your desk. Or maybe summer doesn’t feel like summer unless you make it to a baseball game. Treat yourself – just not to everything. Work the thing that matters most into your budget -- you can do this with the help of budgeting apps like Mint, LearnVest or Level -- and say no to the rest. When you get a raise maybe you can pick another treat. Having something to look forward to will keep budgeting from feeling like a chore so you can stay on track. (For tips on finding the best app for you see, “Can't Control Your Spending? There's An App For That, But Does It Work?”)
No matter how much you make now, it never hurts to make a few extra bucks. From freelancing to participating in the sharing economy, this simple guide will show you how.
Spend to keep a life emergency from turning into a financial one. In case of emergency you should sock away enough cash to cover three to six months of essential expenses. The right amount for you will depend upon how secure your job is, your health insurance deductible and maximum payout as well as how much help you can expect from family. Another key factor is what number helps you sleep at night.
Of course you won’t be able to put all that money away at once. Start your budget with savings to make sure that cushion doesn’t get eaten up by less important expenses. Commit to transferring a percentage of your paycheck into a no-touch account before budgeting in fun stuff and ideally before signing a lease. A big rent burden makes it hard to get the other math to work. (For more on emergency savings see Maggie McGrath’s, “In Case Of Emergency, You Need To Save... How Much, Exactly?”)
Spend with an eye toward 2060. Most people think about retirement savings as money that “gets ripped out of my hands into my 401(k),” says Bonneau. But she recommends recalibrating to view it as, “I am choosing to spend money on the future life I want.”
If your employer provides a 401(k) plan use it. Invest at least enough to get any matching funds you’re offered and work toward putting away 10% of your pre-tax salary. If you can’t get an account through work set up a Roth IRA (individual retirement account). Since Roth contributions are made after tax you will be able to withdraw funds tax free in retirement -- when you will probably be in a higher tax bracket. Another reason to fund a Roth IRA is that in an emergency you can withdraw your contributions (although not your earnings) without owing any additional tax. (For more on how to start saving for retirement see, “Start Now: A Step By Step, Tough Love Guide To Saving For Retirement In Your 20s”)
Spend slowly. Ask a few people about the best money they’ve ever spent and at least a few will mention a laugh-a-minute vacation with friends, an incredible meal to celebrate a significant other’s birthday or a once in a lifetime Bruce Springsteen concert. In fact, behavioral scientists have found that spending on experiences makes people happier for longer than spending on things. Unfortunately these pricier than average expenses often don’t fit neatly into a monthly budget.
For experiences that don’t have a set date give your childhood piggy bank an upgrade. Instead of spending $5 bills stash them in a jar until you have enough to cover the cost. A more tech savvy route is Digit, an app that monitors your cash flow and automatically saves small amounts of money you are unlikely miss.
If you know you want to take a vacation in, say, six months figure out the cost of the trip. Divide that by six months (/26 weeks/182 days) and budget to save that much each month. This should be in addition to your emergency savings if you are still building them. Another option is online bank Simple which allows you to set up goals and automatically puts the appropriate amount toward that goal each day. That money is removed from the cash you have available to spend.
Spend on a stock (or 30). One of the reasons young people have been reluctant to buy stocks is a simple lack of understanding. We saw the market fall apart, we didn’t understand why, so we decided it wasn’t for us. But the reality is you need equities if you want a fighting chance to fund your retirement and many other things you’ll want over the course of your lifetime. For example, many parents use stocks to help build up college savings for their children. It is best to get over any stock-shy feelings now and the best tactic is to dive right in.
No, I am not advocating you become a day trader. But buying a single share and watching how it gains (or losses) value over time can help you get comfortable. Startup broker Robinhood offers commission-free trading on its easy to use mobile app. (You still need to pay for the share.) Another option is Motif Investing which charges $9.95 in commission for 30 stocks professionally balanced around a theme. Since Motif offers fractional shares this is also a way to get a piece of a company you wouldn’t normally be able to afford. (For more on the basics of investing see, “'What The Heck Is A 401k?' And Other Investing Questions You're Too Embarrassed To Ask”)
Spend to pay down debt. In college you probably more or less ignored the growing loan balance that kept you in the clear on your tuition bills. After leaving school you get an automatic six month grace period before you have to start repaying your student loans. When your six months is up pay at least the minimum you have due and more if you can. Interest will continue to build so the sooner you pay down the balance the less you’ll owe in the long run. (For more on how to approach your debt, student or other, see, "Down With Debt: The Two Methods That Will Get You Out Of The Red")
Spend on purpose. “Purposeful decision making is the difference between financial health and not,” says Bonneau. “People haphazardly pick how much to spend on rent, on a car. It is important at the start of your financial independence and career to make sure you do things on purpose.”
