8 Pieces of Financial Advice for New College Graduates

College graduation is exciting and stressful as you look for a job and start work in your chosen field. Not only are you trying to get the hang of working full-time, but you may also be trying to rent your first apartment, pay bills and handle all of your new financial responsibilities. That’s why it’s important to read financial advice tailored to new graduates. After all, 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. 

If you just traded in your cap and gown for your first taste of real adulting, managing your finances might feel like an overwhelming task. The good news is, it doesn’t have to be. 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. 

By focusing on a few key areas, you can create a system that works for you. Follow this financial advice for new graduates to help you start out on the right foot. 

First, look at your money patterns 

Part of managing your finances effectively after graduation (and in general) is understanding your personal money beliefs. Everyone has particular habits regarding money, and understanding yours can help you avoid problems before they start.

Before opening accounts or building budgets, spend a little time reflecting on your patterns.

If you’re prone to overspending, it’s important to know so you can avoid debt. You may need to create rules for yourself, like that a percentage of your paycheck needs to go toward retirement savings before you can buy something just for fun. 

If you go in the other direction and have difficulty spending money on yourself, you may need to develop strategies to help you enjoy what you have now while saving for the future. You don’t have to go crazy and start spending hundreds of dollars a month, but building a little fun money into your budget is important so you don’t feel deprived. 

Financial advice for new college graduates

Once you’ve reflected on how you handle money and have strategized how to deal with your patterns, it’s time to focus on the topics that will help you manage your finances and set you up for success after college graduation.

1. Start an emergency fund.

Before you start divvying up your paycheck into budget lines, it’s a good idea to decide first how much savings you need to set aside for a rainy day. While you may have family you can turn to if things get rough, it’s important to start preparing for the financial bumps that come with being an adult.

Set aside a little bit from each paycheck—even $20 can add up over time—in a separate savings account. 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.

If you received money as graduation gifts, that is a perfect start to an emergency fund. It might not be as fun as a new gaming system or ski pass, but following this financial advice for new graduates will serve you better in the long run.

You may not be able to escape using a credit card for some unexpected expenses, especially if you’re just starting a new job and haven’t had time to build your savings. Use your emergency fund to cover the cost as much as possible. Then work on paying off any new debt and rebuilding your savings over time.  

2. Create a budget; it’s the most important financial advice for new graduates.

After you set an amount for your emergency fund, 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 will make sure you don’t launch into the world without the safety of margin. Pay yourself first to avoid sabotaging yourself later.

Budgeting may not sound sexy, but it is a time-tested tool for being an independent and even wealthy adult. In its simplest form, budgeting is building a plan around what comes in and goes out each month. There are many different approaches, and creating a budget that works for you is important. 

If you’re managing finances for the first time and want guidance, consider using a simple method like the 50/30/20 rule. 

In this method, your expenses are broken down based on your needs, wants and saving for the future.

50% of your money goes to needs like your rent or mortgage payment, utilities, cellphone, groceries, student loan payment, insurance, car payment and prescription medications. If you are paying back credit card debt, your minimum monthly payment should go in this category. 

30% is for wants, like entertainment, eating out or travel. 

20% goes to other debt repayment and savings. This might be contributions to your retirement account and emergency fund, as well as credit card payments above the minimum amount or other debt you may have. 

You may not get your expenses to match the 50/30/20 percentages. That is expected when first starting, so don’t beat yourself up. Once you’ve covered your needs, try to prioritize saving as much as possible before adding in wants or unnecessary expenses.

3. 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; you just have to do them with a plan.

It may sound confining to live within strict monetary boundaries with little room for spontaneity. However, 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.

4. Consider ‘sinking funds’ to allocate money for specific expenses.

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

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 an amount from every paycheck into a sinking fund within your savings account and let the money earn interest. It’s like stealing from yourself now to pay for purchases later. Bonus points if you set up the withdrawal to take place automatically. 

5. Understand and build 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 help you in several ways, including more competitive rates on certain types of insurance, lower interest rates and better chances for mortgage loan approvals. A strong credit score is also necessary for renting an apartment or opening a new credit card. 

Your credit score is based on your credit history. It predicts how you’ll use credit and tells a lender how likely you are to repay a loan. Your credit history is made up of several factors, including:

Your bill-paying history

The amount of unpaid debt you have

The type of credit mix (the number of credit accounts and types of loans) you have

How long you’ve had credit accounts

How much of your available credit you’re using, called your credit utilization rate

If you’ve ever had a debt sent to collections or declared bankruptcy

New applications for credit

If you don’t yet have a credit history or score, it’s important to start building one. If you don’t qualify for a standard credit card through your bank or credit union, some sound financial advice for new graduates is to consider a secured credit card. 

A secured credit card often requires a cash deposit of a couple hundred dollars to open. That deposit usually becomes your credit limit. As you make purchases, your deposit is reduced until you make your payment, which restores the balance for the next month.

When you make on-time payments, many secured credit cards will report them to the credit bureaus, helping you build your credit history. Select a card that reports to the credit bureaus, and make all payments in full, on time. 

6. Make sure you understand compound interest.

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. In a savings environment, it means your money is working for you, and it works best when it is given plenty of time. 

In fact, compound interest is so powerful, that if you spent only one decade, 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 same is true, however, in reverse. Compound interest on loans or credit cards works 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. 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 more damaging and counterproductive to your financial well-being.

For example, let’s say you charge a $1,000 vacation to a credit card with 16% interest. If you make minimum payments of $25 per month, at the end of the year, you would still owe $850. Keep making minimum payments, and that 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.

7. Start saving for retirement—it’s never too early for new graduates to follow this financial advice.

It might seem like you have decades before you need to start saving for retirement. But starting now can pay off in the future. Through compound interest, you have the potential to earn much more by investing over a longer period than you would if you started investing later but with more money.

With compound interest, your initial investment earns money, and your interest also earns interest. For example, if you invest $500 and earn 5% the first year, you’ll make $25 in interest. 

If you made no additional contributions and continued to earn 5%, your balance would be $551.25 at the end of year two.

The math looks like this:

First year: $500 x 5% = $25

First-year balance: $525

Second year: $525 x 5% = $26.25

Second-year balance: $525+ $26.25 = $551.25

If your company offers a 401(k), it’s a good idea to sign up as soon as you’re eligible, especially if the company offers to match some or all of your contribution. This is free money, so plan to contribute to your employer match program to the full amount. Then, make additional contributions as you can afford to do so, like whenever you get a pay raise. 

Contributing to a 401(k) can also help when tax time rolls around. Any money you contribute comes out of your gross paycheck, reducing your taxable income. 

If your employer doesn’t offer a retirement plan, consider opening a traditional Individual Retirement Account (IRA), which also uses pre-tax money, or a Roth IRA, funded with after-tax (i.e., from your net paycheck) money. 

Each type of retirement account has its own rules and limits. Do your research to find the best plan for you and start contributing as soon as possible. 

8. Develop a student loan repayment plan.

Depending on the type of loan you have, you likely have a six- to nine-month grace period before you need to start making payments, although interest will likely still accrue during this time. 

While your grace period is still active, the financial advice for new graduates is to develop a strategy to start paying everything back is important. Determine what you owe, how much your loan payment will be, and how it will fit into your monthly budget. This is also a good time to check in with your loan servicer and update your contact information so there are no issues when repayments begin.

Use an online calculator like the Department of Education’s Loan Simulator. Run different scenarios to help you determine which payment will work best for you. 

Refinancing might be a good option if you have a loan with a high interest rate. If you haven’t found a job or can’t begin making payments after the six-month grace period, you may need to request a deferment or forbearance from your loan company. 

Work with your loan servicer to develop a plan before your grace period ends. That way, you have plenty of time to ensure you find a situation that works. 

Bottom line of financial advice for new graduates

Being financially responsible for yourself can be stressful. Spend some time developing a plan to help you succeed. Understand how you think about money and focus on a few key aspects to start on the right foot. 

Your financial life might get more complicated as you get older. Focusing on this financial advice for new graduates can help you build a solid future.

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