The New Graduate’s Guide to Personal Finance

We know that prevention is the most effective way to maintain a healthy lifestyle. It’s why we wear seatbelts, visit the doctor for checkups and exercise. But prevention is just as important for our financial well-being too.

Learning how to manage your finances before money mistakes happen can help you avoid easy-to-make slip-ups like dings to your credit score or an overdrawn bank account. Recent high school and college graduates have a unique—possibly once-in-a-lifetime—opportunity to set long-range monetary goals and develop lifelong healthy financial habits that impact everything from the ability to qualify for a mortgage to being able to afford big-ticket items like furniture or vacations.

Whether you graduated debt-free or with a mountain of student loans, designing a plan to eliminate debt and prevent overspending while proactively stashing away money for the future will help you avoid the financial fatigue and stress that plague many working adults. Following a financial independence plan, which includes a savings system and budget, will be the key to chasing your goals while maintaining a roof over your head and food in the fridge. Budgeting may not sound sexy, but it is a time-tested tool for being an independent and even wealthy adult.

Before you start divvying up your paycheck into budget lines, decide first how much savings you need to set aside for a rainy day. Some people refer to this as an emergency fund, but it is essentially three to six months’ worth of living expenses you can use to pay for essentials if you lose your income or get hit with unexpected bills, such as a car repair or medical emergency. After you set amounts for your rainy day and retirement savings contributions, decide how much you can afford to pay for rent, groceries, utilities and all the other bills that come with everyday life. Deciding the budget in this order—savings first and then spending—will make sure you don’t launch into the world without the safety of margin. Pay yourself first to avoid sabotaging yourself later.

From here, there are several approaches to financial wellness, and tailoring your money habits to your personality will be key to making them stick. But remember: healthy habits are no match for the detrimental impacts inflicted by living beyond your means. The one non-negotiable rule of finances, no matter what path you choose, is to spend less than you earn. 

Stick to your budget, save religiously and watch as your wealth-building power increases with every interest-bearing year.

Try incorporating these six wealth-builders into your financial plan now to take advantage of the limited opportunity that exists when youth and wise money management combine.

1. Sink your money.

You have known expenses every year, like charges for insurance and streaming services, and that’s not money you want to have at risk when bills show up in your inbox. A traditional large savings account is a great idea, but you can take that one step further by setting up individual mini savings accounts, called sinking funds, that set aside money for a singular, specific savings purpose. 

This is a useful method for big expenses, like the plane ticket you’ll need to buy to fly home for the holidays, as well as the things you don’t want to forget, like the Christmas gifts you’ll buy in a panic the week before your trip. Drop a scheduled amount from every paycheck into a sinking fund within your savings account and let the money earn interest while it waits for you. It’s like stealing from yourself now to pay for purchases later. Bonus points if you set up the withdrawal to take place automatically. 

2. Understand your credit score.

Although relying on a wallet full of credit cards is treacherous territory, striving for zero credit isn’t the goal either. Having a healthy credit score (generally 700 and above) can save you money in several ways, including more competitive rates on certain types of insurance and lower interest rates and better chances for approval on mortgage loans. 

The key to using credit cards is to see them as a strategic tool that should be used only after you are living faithfully on a budget. Any benefits of building good credit will be significantly overshadowed by the negative impacts of credit card debt, so a debit card will serve as convenient training wheels in the meantime while you master the budget-based life. 

Once you’ve figured out how to stick to your savings and spending goals for at least six months, then choose a credit card with no annual fee, commit to never charging anything you haven’t already budgeted for and pay off the entire balance every single month.

3. Compound interest can be your best friend. 

Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” Simply put, compound interest is the interest applied to interest. Compound interest in a savings environment means your money is working for you, and it works best when it is given plenty of time to do that work. 

In fact, compound interest is so powerful, that if you spent only one decade of life, from ages 18 to 28, investing money each month into an interest-earning account, and then stopped contributing savings after that, you would have more money by retirement age than someone who invested the exact same amount each month for the rest of their working years, but didn’t get started until age 28. The longer money has time to work, the more it can do. 

4. But it can also be your worst enemy.

The same is true, however, in reverse. Compound interest on loans or credit cards is compound interest that’s working against you. The balance of your debt will continue to grow every single billing cycle—likely at a higher interest rate than your savings account—until you pay it off in full. Home and student loans are generally exempted as “good debt” because they are investments that appreciate over time as an asset or help you increase your income. Loans on depreciating assets, however, like cars and shopping sprees, are often much more damaging and counterproductive to your financial well-being and long-term goals.

For example, if you charge a $1,000 vacation to a credit card with 16% interest (a low rate in the credit card world) and make minimum payments of $25 per month, at the end of the year, you would still owe $850. Keep making minimum payments, and that steal-of-a-deal weekend away will end up costing you $1,438.56 and take you four-and-a-half years to pay off. 

Pay yourself first, allow compound interest to work for you, and don’t use credit cards as a free pass to outspend your budget.

5. Choose the right retirement fund.

It may seem strange to think about retirement before you even start your career, but saving for retirement as soon as you reasonably can is one of the smartest financial decisions you can make. There are many retirement account options that harness the power of compound interest, and most are divided into two major types: tax-deferred and tax-exempt. 

Tax-exempt accounts often include the word Roth (like Roth IRA or ROTH 401(k), and allow you to invest money you’ve already paid income tax on, then watch it grow tax-free until retirement. Traditional IRAs and traditional 401(k) accounts are tax-deferred, which means they provide a tax deduction for the money invested into them, but then require you to pay tax on any withdrawals.

The most magical of all retirement investment strategies is an employer match program, like can be found in a 401(k), a 403(b) or a 457. In these programs, many employers will match your investments up to a designated amount to incentivize your savings. This is free money, so plan to contribute to your employer match program to the full amount first, and then make additional contributions as you can afford to do so.

Although retirement investing is a crucial element of wise money management, it’s important to realize that these types of accounts will be essentially locked for withdrawals until you reach your sixties. Take advantage of them, but be sure to do so in tandem with a savings or investment plan that is accessible for more immediate emergencies or opportunities.

6. Budget play money.

Learning to live within your means for a lifetime includes considering entertainment and hobbies as an important investment in your overall happiness. When you’re just starting out, the percentage budgeted for fun activities may be small—like one matinee a month or buying the name brand soda instead of generic—but as your income and savings grow, so too can your allotted entertainment fund. You can certainly continue to do the things you love to do; you just have to do them with a plan.

It may sound confining to live within strict monetary boundaries with little room for spontaneity, but living on a budget gives you the freedom to enjoy a vacation or a concert or dinner out without the worry that another part of your life will suffer financially because of it.  Budget wisely, save consistently and you’ll have the building blocks for a life that is never controlled by debt—a life where money is simply a tool to help yourself and others live life to the fullest.

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