When you’ve been living on a college budget, the first real paychecks from your post-graduation job can feel like more money than you know what to do with. Here’s how to spend, save and invest that income while paying down debt and splurging a bit, too.
1. Create a simple budget
Yep, a budget is the first step. Once you give each dollar a purpose and ensure you’re meeting essential needs, you can spend on things you value and feel confident that you can afford them.
The 50/30/20 approach is a good budget starting point.
- Spend 50% on needs like rent, groceries and minimum loan payments.
- Spend 30% on splurges like trips, takeout and concert tickets.
- Spend 20% on savings and extra payments on high-interest debt.
2. Make a money priority list
You can’t do everything at once when you’re saving money and repaying debt. Prioritize in this order:
- Save $500 for emergencies in a high-yield savings account.
- Contribute enough to your 401(k) to get your employer’s match, if there is one.
- Pay off high-interest debt like credit cards.
- Save for retirement. Aim for 15% of your pretax income.
- Grow your emergency fund. Aim for three to six months’ worth of expenses.
3. Understand investing basics
While buying individual stocks is one investment option, it’s not what personal finance experts recommend for beginners.
Your first priority is a retirement account like a 401(k) or Roth IRA, even as you embark on what will likely be a decades-long career.
The money in these accounts is invested in stocks and bonds and grows over time due to compound interest. For example, every $1,000 invested at age 22 becomes nearly $20,000 when you are 72, assuming a 6% rate of return.
4. Establish a retirement plan
So how do you actually start saving for retirement? If your employer offers an account like a 401(k), make a transfer from each paycheck to it. If the employer offers to match your contributions to a certain amount, aim to contribute at least enough to get the full match — it’s free money!
If you don’t have an employer-sponsored retirement account, open an individual retirement account through an online broker or automated financial advisor. A Roth IRA is a tax-friendly option for new graduates.
5. Take an inventory of student debt
Saving for the future is crucial, but you’re likely facing something more pressing: student loans. Start dealing with them by answering these questions:
- Are the loans federal, private or a mix of both?
- How much do you owe?
- What are the loan interest rates?
Most student loans are owned by the Department of Education. To see your federal loan details, visit the Federal Student Aid website. For private student loans with a bank like Sallie Mae or Discover, check your account with that lender.
6. Begin making student loan payments
Most student loans have a six-month grace period, meaning payments won’t come due until late fall. But if you can start making payments earlier, you’ll save on interest and establish the habit of paying.
For federal loans, you’ll make payments to your loan servicer, the company the government hires to handle loan repayment. If your monthly payments are too high relative to your earnings, apply for an income-driven repayment plan that caps payments at 10% to 20% of your income and forgives the remaining balance after 20 or 25 years. Private student loans aren’t eligible.
7. Work on your credit
You may be hard-pressed to name a benefit of student debt, but here’s one: Consistent on-time payments reflect positively on your credit. And a credit score in the high 600s or above is essential to accessing the best rates on loans, insurance and a mortgage. Some employers and landlords check credit, too.
Review your credit report to see where you stand. Chances are, you don’t have much of a file. To start working on your score, apply for a secured credit card or a basic credit card at your bank.
8. Use credit cards as a tool
Having a credit card doesn’t mean you have to carry a balance.
Instead, pay off your card on time every month and use less than 30% of your available credit. If your card limit is $3,000, for example, limit your balance to $1,000 or less.
As your credit improves, you’ll qualify for cards with more benefits like cash back and points or miles.
9. Make your money work for you
Earning credit card rewards is a prime example of making money work for you.
Another example: If you have good credit and relatively low debt compared with your income, you can refinance student loans to a lower interest rate. This will free up money to invest, spend on a vacation or save for a down payment.
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Teddy Nykiel is a writer at NerdWallet. Email: email@example.com. Twitter: @teddynykiel.