One more class for new graduates: Personal Finance 101

A checklist for this year’s college graduates:

• Diploma? Check.
• New job? Likely.
• Cool apartment? Hopefully.
• How about a budget? Credit record? Savings plan? Maybe, or maybe not.

Managing money and saving for retirement might not be a priority for some new graduates (especially when they are still celebrating their academic achievements and experience), but it should be. It’s never too early to start building your financial future.

Here are some tips for college grads to put their best financial foot forward.

Build a budget — If you’ve been living frugally as a student, you might be tempted to splurge once you obtain full-time income. It’s okay to reward yourself occasionally, but it’s best to live below your means whenever possible. When you receive your first paycheck from your post-college job, determine your net monthly income and compare it to your expenses, including rent, food, utilities, phone, insurance, car, and debt. Of the remainder, allocate a percentage for savings (try to save at least 10% each month) and a percentage for discretionary spending such as entertainment, dining out, or travel. If you haven’t moved into your own home or apartment yet, it’s smart to set aside an amount equal to average rent in your desired location and put the money aside until you’re out on your own. The key element of any successful budget is to spend less than you make.

Establish credit — Having a good credit history will help you qualify for mortgage or vehicle loans, apartment rentals, and sometimes even jobs. It might be difficult to obtain credit after graduation because major credit card companies might assume your parents no longer will guarantee payment. Gas or department store credit cards are usually easy to obtain. Check to see that any card you apply for sends reports to the major credit bureaus, to help build your credit history. Another option is to apply for a secured credit card, which requires you to deposit money into a savings account. Deposit minimums vary and interest rates can range from 10% to 25%. Once you have a credit card, pay the balance in full each month. Late payments can damage a credit report for years. Unpaid credit card debt can accumulate and carry high interest rates. And outstanding credit card debt can impact your ability to get other loans in the future. If you have student loans, consolidate them into a single monthly payment and make sure you pay on time. Finally, monitor your credit score with credit bureaus to guard against identity theft and to ensure accurate credit history.

Automate your savings — Payroll deductions not only are a simple way to ensure you save regularly, they are relatively painless — you never “miss” the money because it goes directly into savings. You can set the amount you wish to save based on your monthly budget and then let the savings accumulate over time.

Create an emergency fund — It might seem that between paying off debt, saving money, and contributing to a retirement plan you’re doing enough financial planning. But preparing for the unexpected is a crucial element of your financial wellbeing. An emergency fund can help you cover costs for an unexpected medical bill, car repairs, or lost income if you lose your job without relying on high interest credit card debt. Start by contributing what you can afford after covering all your expenses and retirement contributions, with a goal of reaching enough to cover three to six months of living expenses.

Contribute to a retirement plan — If your employer offers a 401(k) or other retirement savings plan, contribute as much as you can afford, and try for at least as much as the employer match, if there is one. If your employer does not offer a plan, you can open an Individual Retirement Account (IRA). You also can consider opening a Roth IRA, which allows you to contribute up to $5,500 per year. Although contributions are not tax deductible, qualified withdrawals are not taxed.

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Make good decisions early — Decisions and actions you take early in your adult life have a significant impact on your long-term financial status, restricting your options or affecting your ability to borrow money for a home or other purpose for years. By managing your expectations and planning for the long term, ultimately you can achieve the lifestyle you desire by following a few basic guidelines.

• Control your debt — Using a credit card for dining out, drinks with friends, weekend trips, and other entertainment items can be tempting after landing your first post-college job and a steady income. But credit card debt adds up quickly and silently and can put you in a financial hole for years, in addition to lowering your credit score.
• Resist the urge to splurge — A new wardrobe for your new job or a new car to replace your very used college vehicle would be nice, but you’ll be better off saving that money instead. Over time as you establish credit and build savings, you’ll be in a stronger financial position to make major purchases or increase your discretionary spending.
• Build and protect your credit score — A good credit score makes it easier for you to rent an apartment, qualify for a mortgage loan at an attractive interest rate, or qualify for contracts for utilities or cell phones. A good credit score also can result in lower interest rates for credit cards and lower finance charges if you do have a balance. A good credit score won’t guarantee you’ll be approved for a loan, but it does improve your chances and provides the ability to qualify for lower interest rates and higher borrowing limits. Landlords check credit scores of potential renters, meaning a good score can help you get an apartment or home you desire. You might also be able to avoid security deposits for utilities and cell phones, or receive lower rates for car insurance.

Seek financial advice — Although there are many sources of information from which to choose, including financial apps and other resources and tools, consider working with a personal banker or financial advisor to help ensure you are taking appropriate steps to manage your money and help you avoid mistakes. Searching the internet for financial topics can help you get oriented, so long as you focus on reputable sites. But no internet site can take into account your specific situation in the way personalized guidance from an expert can. Even small decisions should be considered within your overall financial plan and long-term goals.

Too often, people make financial decisions or errors that seem innocuous at the time, but can have long-term consequences. A single missed credit card or utility payment, even for a few days, can result in an immediate, significant drop in your credit score that can take years to repair. Consider setting up automated payments to avoid the risk. Another common error is maxing out credit card limits, which can make you appear to be a credit risk. It’s best to use only a portion of your available credit — some credit experts recommend 40% or less. Over time, as your income increases, your credit limit can be adjusted accordingly so as you spend more you continue to use only a portion of your available credit.

Other early career financial mistakes are failing to save regularly or to save enough to get an employer match in your retirement account, with lifelong consequences. You miss out on the benefit of compound interest over time. For example, two individuals who contribute $200 per month to a retirement account with an estimated 6% rate-of-return will have vastly different results depending on when they start to save. The person who starts saving at age 25 will contribute $96,000, which will grow to $400,000 at age 65. In contrast, the person who waited until age 35 to start saving will contribute $72,000 and will have $200,000 at age 65.

You’ve taken the first step toward financial security by completing your education. With thoughtful planning and decision-making, you can avoid mistakes, build solid credit and ensure your chances of lifelong financial wellbeing.

Chimeng Yang is banking center manager in Cottage Grove for Wisconsin Bank & Trust, Member FDIC.

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