10 Common Financial Mistakes Made by New Graduates

by Rebecca Black on May 29, 2012

The academic world offers college students a relatively secure and structured environment for learning. However, millions of recent graduates face great challenges upon graduation when it comes to financial management. Smart financial planning the first couple of years after college can set the tone for essential financial habits later in life. Recent college grads tend to make these following common financial mistakes:

  1. Neglecting long-term saving

    Recent college graduates tend to get used to seeing their name on paychecks and thinking they’re too young, or still have time, to start setting money aside. A portion of paychecks should be put into savings or an account that can help you earn higher yields over time. This money will come in handy in times of financial strain and future emergencies.

  2. Waiting to build credit

    Building good credit comes in handy for a number of reasons: leasing an apartment, buying a home or car, or applying for insurance or any type of loan. A common mistake recent college grads make is that they wait too long to start building credit, and when it comes time to start making bigger purchases, not having some sort of established credit results in higher interest rates. Start small — get a credit card to start building your credit.

  3. Living off plastic

    Recent grads often fall into the cycle of using credit cards for everything, which may result in living beyond one’s means. Credit card debt is a great financial burden that will plague you if you can only afford the minimum payment every month. The best way to build credit is to keep one credit card active and pay off the full bill on time, every month.

  4. Failure to Budget

    A crucial component of smart financial planning is budgeting. However, it’s hard for recent grads to plan an effective budget because of debt and other hardships that come with independent living. Knowing how to juggle these costs is a skill that must be learned. A money management tool like Mint, for example, may help visualize where money spending is going, and help set up a budget plan for your financial accounts. It may be difficult to fully commit to a budget plan once it’s been established, but most behavioral changes take a total transformation of attitude and mindset. Once you’re aware of where you’re money is going, you can make different categories and allocate funds accordingly.

  5. Postponing student loan payments

    Not paying back student loans in time can have disastrous effects on your credit score. Luckily, there are ways to manage student loans, even for those who are unemployed or cannot afford to deal with student loans straight out of college. Some options are consolidation, deferment, and forbearance. Consolidating your debt often creates a lower repayment rate, but you should check the interest rate, as it could mean costlier repayments over time. Deferring your student loans allows you to postpone repayments with no accrued interest (if the loan is subsidized). However, you must meet certain criteria, such as being a full-time student or unemployed. Forbearance, similar to deferment, allows you to temporarily make smaller payments or extend the time for making payments due to financial hardship or illness. However, with forbearance, interest accrues at the rate that your loans were made. Explore these options or talk to your loan provider to see how you can manage your student loans without harming your credit.

  6. Making minimum payments

    The dangers of making minimum credit card payments are now spelled out on monthly credit card statements, as established by the CARD act of 2009. The higher the balance, the longer it will take to pay off because of accrued interest over time. Many recent college grads can only afford to make minimum payments, which often leads to spiraling debt.

  7. Not tracking bill due dates

    Sometimes it’s hard to juggle rent, loans, utility bills, and credit card fees. However, not paying bills on time will only incur fees and significantly damage credit scores. This also can lead to interest hikes, resulting in additional financial strain. There are many tools to help you remember and track due dates — setting up text or email alerts, signing up for automatic bill-pay online, or bulk-paying yearly for some services.

  8. Living beyond means

    Most college students want to be independent straight out of college, but this often leads to living beyond one’s means. Timing is everything when it comes to moving out, buying a car, and being totally self-reliant. Sure, landing that first job may make you feel entitled to certain purchases, but sometimes saving up money before doing so is more beneficial. In the long run, making sure you’re not strangled by debt instead of being independent right away should be carefully considered by every recent graduate.

  9. Not building an emergency fund

    It’s often a good rule of thumb to have enough money in your emergency fund to last you three months. This includes food, shelter, and necessary expenses. Save yourself the risk of borrowing money on a high interest loan or credit card for those rainy days — you never know when you may have a medical emergency or expensive car repair. It may be difficult for recent grads to set up an emergency fund, but just small allocations every week or month is a good start. Setting up automatic transfers to your emergency fund can also help you manage this efficiently.

  10. Using leftover student loans

    For some fortunate college students, it’s possible to have some money leftover from a college or personal loan. Instead of aimlessly spending this money, put it towards paying back money you borrowed. Many students may fall into temptation when presented with this extra money, spending it unwisely. Avoid this mistake and use the leftover money for debt-related expenses.

Categories: Building Credit

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