It can be an eye opening experience when you first graduate from college and lose many of the safety nets that you have grown accustom to having during school. Now that you are on your own, you have to start thinking about your financial future. Many football coaches are famous for saying that the Super Bowl isn’t won in the spring every year but early in the season with hard work and dedication in the gym and the practice field. The same is true for your finances.
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The early retirement of your dreams isn’t set up in your 30s or 40s. It isn’t a lightbulb that comes on after a few years of working. Laying the foundation for a great financial future starts immediately after graduating from college when you land your first job. You have to start that early, and college graduates are making several key mistakes that are setting themselves up for financial disaster early own or at least a lifetime of working and a slave to debt.
Here are five mistakes that college graduates need to avoid right now to help start their lives off on the right foot.
Delaying your investment for retirement even by just a few years can cripple your savings thanks to the power of compounding interest. For example, a recent college graduate investing $5,500 in a Roth IRA from the time he or she is 22 years-old until the age of 65 will accumulate over $2.1 million by the time he or she retires assuming an 8% annual rate of return.
If you were to delay starting your investing for just five years, you would only amass approximately $1.4 million for your retirement nest egg. And, waiting 10 years until you think you can afford to start saving for retirement would only allow you to accumulate just over $936,000 under these same assumptions. Waiting even just a little bit before you start investing can be devastating. You have to start immediately!
One of the biggest mistakes that young people make is not having a household budget. Many people simply think that since it is only one person and not a family, they do not need a budget to monitor their spending, savings, and investing. This is the most critical time where debt can stunt your financial growth for decades to come. One of the most effective ways to ensure that you spend less than you earn is to have a written budget that you follow.
I made a vow to myself after I got my first job after graduating with a Bachelor’s Degree that I would never eat Ramon Noodles again. Now, there’s nothing wrong with that, but after living on it for four years, I personally do not want to see another one as long as I live. So, it is okay to spend the money that you earn on things like good food, eating out at restaurants, and traveling.
You have to know the limits of your budget. You have to live within your means. Maybe that means that you rent an apartment instead of trying to buy a house. Maybe that means that you continue driving your beater car while saving to pay for a new car with cash. Spending more money than you earn is a recipe for credit card debt and other consumer loans that will take years to pay off.
Believe it or not, but moving back into your parents home after graduating from college is a mistake. There is little incentive far too often for you to want to leave the comfort of home if you go back. The best thing you can do for your long-term financial health is to move forward with your life and not return home to live.
There will be a few exceptions to the rule where you will have to, but prior planning before graduation, job searches early, and the willingness to take more of an entry level position commiserate with someone who has just graduated college will set you up with the right skills, self-confidence, and work ethic needed to succeed on your own.
It is far too easy to move home after graduating under the guise of saving for a down payment or saving for some other reason. Far too many people slip into the old habit of expecting a parental bailout and a life of not saving and living above your means. Moving out is a forcing function that will ultimately lead to you taking control of your financial future with better success.
There is a lot of bad financial advice that is floating around, and many college graduates are often the targets because of their inexperience. Be careful who you deal with and the types and amounts of fees that you pay for services. For example,
I can remember being suckered into both life insurance and front end load mutual funds right after graduation and lost hundreds of dollars on this bad financial advice.
Have you made a financial mistake right out of college, big or small? I’d love to hear other examples on what you would have done differently. What would you have told your 22 year-old self in order to escape a financial mistake if you could go back in time?