Too much financial advice is about pulling yourself up out of hardship.
I’m glad it exists; people in a money hole need a way out. But wouldn’t you love to skip the hole-digging and get right to the having your life together part?
Your early 20s is a key place to set a financial foundation. You can quickly erode your financial health with unmanageable debt and expenses, or you can build a solid safety net and a plan that helps you weather this transitional period and come out on the other side on solid ground.
Hint: Choose the latter.
Here are five things to know about your money by the time you leave college to set yourself up for a solid financial future.
5 Things to Know About Your Money After College
Figure out the answers to these questions now to set yourself up for financial success for years to come.
1. What’s Your Credit Score?
This sounds like a dreadfully boring place to start, but it’s key to making a solid financial plan. Understanding your credit history and the factors that make up your credit score give you a solid financial picture you can build from.
You can get a free credit report directly from a credit bureau, but that won’t include your score. Instead, I recommend a tool that shows you your credit score and the elements of your credit history that affect it.
Among other information, these tools will let you see:
- Your FICO score or VantageScore. Each of these types of credit scores can be useful. They’re different, though, so make sure you know which one you’re looking at and how it compares to what creditors and lenders will see.
- A breakdown of your debts. Any credit cards, auto loans, personal loans and student loans in your name will show up, including how much you owe and which company you owe it to.
- Payment history. You’ll see if you have any outstanding negative marks, like unpaid bills. You can use this information to pay them off and clean up your credit or, if they’re old, wait for them to fall off after seven years.
Word of warning: These tools earn money by recommending products like loans and credit cards. Their recommendations can be useful to help you save money and improve your credit — but first make a plan and shop around. You might find better options on your own.
You might learn that you have no credit score, which is also useful information. It means you haven’t borrowed or used credit cards long enough to generate a credit history.
If that’s the case, choose one of these steps to start building credit:
- Become an authorized user on someone else’s credit card — like your parents or another family member.
- Open a secured credit card with a deposit and low credit limit.
- Take a credit builder loan.
- Open a store credit card — but don’t use it too much.
- Finance a big purchase, like furniture or appliances, with the store.
- Use a cosigner for a credit card or small loan.
- Use a service that reports your rent payments to credit bureaus.
Act now: Check your credit score and report details for free through a tool like Credit Karma or Credit Sesame.
2. How Do You Make a Budget?
This is so basic you might overlook it: You have to know how much you spend each month versus how much you earn.
Making and following a budget can be especially tricky during a transition period, like starting a new job or moving. Right after college, you might not have a stable monthly income, and a lot of budgeting advice probably doesn’t feel like it applies to you.
But you should figure out how to make a budget that works for you.
My favorite is envelope budgeting, because it lets you plan for your necessary expenses, debt repayment and savings, and then lets you do what you want with whatever’s leftover. So you don’t have to keep a detailed log of every burrito you buy.
You can use actual paper envelopes if you deal with a lot of actual paper cash — or you can make a digital envelope budget using an app or bank account that includes the feature, like Qapital or Qube.
Or you could simply create a spreadsheet budget and set a weekly money date for yourself (and your partner, family or housemates) to log spending and income and make a plan for the following week.
Master adulting with these tips for financial planning for college graduates.
However you prefer to set it up, a budget should help you see in one place:
- Income. If you have a set salary, you can plan ahead for your after-tax monthly take-home pay. If you have an irregular income, creating a budget to track it can help you find a three-month or 12-month average you can use to plan ahead.
- Expenses. Tracking your recurring expenses, like housing, bills and food, lets you see how the amount compares with your income and could help you spot places to cut back. For example, your housing shouldn’t cost more than 30% of your income, and there are tons of ways to keep your utility bills down.
- Spending. This is what typical budgeting apps show you: Where your money goes day to day. These are your everyday transactions, like eating out, shopping or entertainment. Track this at least when you first start budgeting to spot any trends and places you can cut back when money’s tight.
- Debt. Minimum loan and credit card payments fall into your expenses, because those are necessary monthly bills. Adding debt-specific categories gives you a productive place to funnel extra money each month, so you can pay debts down faster.
- Savings. Don’t forget to budget for saving money after college! If you build savings in around your income and expenses, it’s easy to find room to set a little aside each month.
Act now: Create a simple spreadsheet or download a budgeting app to keep track of your money.
3. How Will You Pay off Debt?
Getting your credit score and report details will help you see how much debt you’re dealing with and who you owe money to.
That means you can make a plan.
Your plan depends on how much debt you have and how much extra money you have to work with each month, so there’s no best plan for everyone and your plan might change as your income changes.
The debt snowball method is a smart plan if you’ve got multiple accounts to pay off with limited income. It eliminates the overwhelm of debt payoff by letting you focus on one debt at a time with however much money you can afford to allocate to it.
If you have federal student loan debt, look into your repayment options. By default, you signed up for a 10-year standard repayment plan, and that might make monthly payments tough to handle. An income-driven repayment plan could help.
Private debts and even credit cards might have more repayment flexibility than you think, too. You might be able to:
- Refinance private student loans to get a lower interest rate.
- Ask for a deferment or forbearance period due to economic hardship.
- File for bankruptcy to wipe out most of your debts.
- Negotiate a payoff amount, especially for debt in collections.
- Negotiate a payment plan that’s easier for you to keep up with.
Act now: Prioritize your outstanding debts in a way that makes sense for you — by interest rates or balances. Use your monthly budget to see how repayment fits in.
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4. What’s Your Long-Term Savings Plan?
You’re probably just getting started in the workforce, so I’m sorry to bring this up, but… retirement.
I know: OK, boomer. It’s far off. It doesn’t matter. You’ll probably work forever.
I’m not asking you to pick out your condo in the Florida Keys. Just add a retirement savings bucket to your budget, and thank your wise young self later.
Here’s why: The earlier you start saving for retirement, the easier it is — and the more you can get for free. Retirement savings accounts are invested into the stock market, with interest earned going back into the account to earn more interest — i.e. compound interest.
Because of compound interest, you only have to save a little bit each month if you start now, and it’ll likely grow to quite a lot by the time you retire… or start your third act or whatever knowledge workers do in their 60s.
Act now: Set up paycheck contributions if your employer offers a 401(k). If not, set up an IRA on your own, and contribute anything. The rule of thumb is to save 10% to 20% of your income for retirement, but save less if it’s all you can afford — it’ll pay off in interest later.
5. Do You Have an Emergency Fund?
One of the best things you can do for your financial health and security — even when you’re on a tight budget — is build an emergency fund.
When money’s tight, it can be tough to set some aside for a rainy day, but won’t you be glad you did? (I’ve been there, and the answer is definitively: YES.)
Don’t be intimidated by recommendations that an emergency fund needs to cover six months’ salary. If I were you, that would keep me from ever starting one in the first place.
Instead, just set aside money as you can.
A few hundred or a few thousand dollars might not pay your rent for six months, but it could keep your budget intact when you get an unexpected electric bill. Those small moments can make or break your financial health, so find tiny ways to always be prepared.
Savings apps can help you save money without even noticing — by taking a little out of each paycheck, rounding up purchases to stash “digital change” or secreting away bucks from your bank account.
Once you have an emergency fund you’re comfortable with, start saving for other short-term goals, too.
You might want to make a down payment on a car or a house, take a vacation, get married or upgrade your living room furniture. Whatever it is, saving ahead in small increments helps you spread the expense across several months so you don’t feel the hit to your budget all at once.
Act now: Add a savings “envelope” or bucket to your budget, and start funneling money into it regularly.
Build a Solid Financial Foundation
As you embark on adulthood, enter new jobs and move into new cities, you’re going to be bombarded with advice to optimize your finances — investing this, credit card rewards that.
This advice is fine, but you need a solid foundation first.
Quiet the noise, and make sure you have these five pillars in place to stabilize your finances before you start gambling on crypto and travel points.
Dana Sitar (@danasitar) has been writing and editing since 2011, covering personal finance, careers and digital media.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.