Did you have an allowance when you were a kid? Maybe some change or a few dollars if you did your chores? Were you the kid who spent your allowance right away or did you save all your pennies toward some big goal? Some of those habits may have followed you to your adulthood. After graduation, you may find the need to take a moment and think through some smart budgeting and cash flow ideas to maintain your financial health.
What does a post-graduation financial person look like?
We hope your client or client’s student has landed that first job they aspired to when they were just a college student. Now their whole future lies ahead. They may be panicking. Some simple planning can go a long way to improve their life as they take every step into financial wellness. Smart budgeting aims to spend less than they earn. However, we are realistic and know that they’ll face bumps along the way (oops…their car needs new brakes and rotors).
A sound underlying plan can help them work through those unexpected expenses. Let’s help them understand cash flow. Cash flows in, and how they control it is a learned response. The most important thing they can do is understand how the money flows, have goals they’d like to achieve, and stay on top of what is going on.
Everyone’s expenses can be split into “needs” and “wants.” Needs are non-negotiable figures for the most part and new graduates may not have learned the lesson that these are their needs:
- student loan payments
- health costs and insurance
- savings (emergency fund & retirement savings)
- credit card payments
Emergency fund and retirement savings are not technically a “must be paid,” but we think it should be non-negotiable. Each month, graduates should carve off a small chunk to put in their savings to build up an emergency fund.
Trying to figure out how much to save each month for retirement will be difficult for new graduates. Some will recommend 10-15%. Some say at least up to what their employer will match. If their employer will match up to 6% of their 401k contribution, then they should plan on 6%. If they start saving in a 401(k) from the beginning of their career, you know they will watch those savings grow and grow through the magic of compound interest. Time is their friend.
As they get raises, they should increase their contribution by 1% each year. They will be saving 10% plus of their pay by the time they are 30. Again, your future client will thank you for helping them understand this concept!
A smart cash flow plan aims to avoid any credit card debt. Those bumps in the road may have other plans in mind. They should think of credit cards as for emergency purposes only and use them sparingly. Using their emergency savings fund when they can. They should aim to pay off credit cards quickly by making higher than minimum payments each month, or when they can, paying them off in full each time they come due.
Taxes and health insurance costs are probably deducted from the wages they receive from their employer. They don’t have any control over these costs and need to just realize they are part of their cash flow.
Now don’t misunderstand us. The items we are putting into the “wants” category are often still things they need–food, housing. Those are definitely needed items. However, they as the consumer have more influence over how much they spend on these expenses.
Graduates have very little say how much their health insurance will cost, but they may have some choices to consider as far as their coverage is concerned. This is a blog in and of itself for the future! One thing to be aware of is that as a young adult, the law does allow them to stay on their parents health insurance until age 26. This may be the most cost effective if mom and dad are willing to keep them on!
Unlike fixed expenses, Graduates can control things like how many times they eat out in a week. These expenses are more within their control because they are based on life choices.
Helping them understand that wants include things that they may think are needs will help. Here are are list of wants:
- Housing (include utilities here: cable, internet, electric, gas, water, sewer, trash)
- Transportation (car and it’s costs like fuel, repairs, and insurance; public transportation)
- Food (groceries and dining out)
- Personal care (clothing, health club, toiletries, phone)
- Pets (food, medical, grooming)
- Entertainment (sporting events, movies, music)
Don’t want to go line by line to track all of this?
Our friends at Student Loan Hero suggest grouping expenses into categories and using certain percentages of take home pay to figure out how much they can afford to spend in each. Housing, including all that goes with it, is capped at 35% of their monthly income. Transportation is capped at 15%, savings 10%, debt payoff 15%, and everything else the remaining 25%.
Using these percentages as a basis, they can make choices about where to live, what kind of car they’ll drive, how often they go to the movies, and so on. Being aware of where the money is flowing every month to is vitally important to staying on top of what is going on in their financial life. Plus, it is a good idea to set up bills to get paid automatically each month, and set up automatic deposits to their savings account so they don’t have to think about it. Automating their money and putting it on autopilot is powerful thing! Just make sure they are checking in at least once per week.
If they are looking for a way to track their budget they may want to consider some free online tools that can help them. One popular tool is Mint.com. They can link all of your different checking, savings, credit cards, student loans, mortgages, and more. They can see everything in one place and use the technology to help keep them on track without always logging in to all of their different providers.
Have a goal in mind.
It can be a big goal like buying a house, getting married, or having children. Or it can be little goals along the way like going on a nice vacation. Having a goal will give them the motivation to practice smart budgeting and keep an eye on that cash flow each month. Reducing their debts and saving as aggressively as they can early in their career will go a long way to getting them to those big goals down the road.