What Overspending Now Means for Your Future Wallet
Student loan debt in the United States is estimated to total $1.4 trillion. It’s rare that you can exit those ivy-clad halls with a diploma in hand without also carrying an invoice for tens of thousands of dollars.
Student loans are taken out with the expectation that the return on your investment will make borrowing worth it. While this premise has long been under debate and is now even more so as college tuition continues to rise, the loans can result in problems even larger than a mountain of debt.
During college, you’re subsisting on money you’ve borrowed from your future self, and simultaneously forming habits around spending, saving, and financial planning. Studies have shown that people will spend more money when using a credit card than when paying with cash, and student loans operate on a similar premise of borrowed, invisible money.
While student loans continue to be inescapable for the vast majority of college attendees, the financial habits you develop in the process may transform into spend-happy patterns that do little to plan for your future.
Spending Now and Your Savings Later
As you leave college and begin your career, you face the challenge of adjusting your lifestyle. Your bank accounts may have run low while job searching, and in the absence of a student loan deposit, it may be a stretch to make it to your first paycheck.
Credit cards can feel like an easy way to make ends meet during this transition. However, with a lack of immediacy similar to student loans, you can rack up debt quickly, promising yourself that you’ll pay it off as soon as you’re making “real money.”
The problem with the promise of “real money” is that there’s no magic number that allows you to stop overspending, pay down your debt, and live within your means. Instead, you’re more likely to upgrade your lifestyle in tandem with your salary. Unless you can learn to live below your means from the start, you’ll never make a dent in student loans or credit card debt, let alone build savings.
It’s hard to set aside savings when you have debt to contend with, but it’s important to understand the effect that ignoring saving in favor of reducing debt can have, no matter how distant the two events seem. The American Institute for Economic Research illustrates that paying down $4,000 in credit card debt can impact potential retirement savings by an estimated $75,000 — and that number can be even bigger depending on interest rates, payment amounts, and annual salary.
It is imperative that as a college graduate, you invest time and energy into financial literacy. Without the knowledge of how to build solid savings now, you stand to lose out on future financial security and the peace of mind that goes with it.
Budgeting to Save Long Term
In order to achieve a sound financial future, you must learn to live within your means now instead of waiting for your income to exceed your spending. It may seem simple, but planning to spend less than you make can spell the beginning of a beautiful financial future.
Budgeting for a new income may require a serious mindset shift and a few new habits. The most important place to start is with your motivation — it’s easy for new habits to fall to the wayside if your “why” isn’t fully outlined. Start by identifying your priorities, and then you can figure out how to achieve them without breaking the bank.
Priorities can vary greatly. For some, paying off student loans and escaping credit card debt may be the primary driver for getting finances in order. Others may want to buy a car or a house in the next five years. Regardless of what’s important to you, tying intangible goals to current saving and spending habits will reinforce positive financial habits.
Once you’ve identified your priorities, you can start planning. Setting SMART goals makes intimidating projects manageable. As you create timelines, it’s imperative to do so in conjunction with your salary and expense data in mind. It’s well and good to plan to pay off loans in three years instead of ten, but if you don’t have enough income to swing the extra payments, your framework will collapse.
Additionally, while short term goals are easier to keep a handle on, retirement goals should always be considered when planning for the future. No matter how far away it may seem, current habits will impact your later quality of life.
When writing a financial plan, it’s tempting to see how much money you can set aside for weekend trips, eating out, or other entertainment choices. However, there’s more freedom in financial security than in spending every penny for current gratification. With a small tweak in mindset, you’ll find that some discipline and sacrifice now will make the future much more comfortable.
Managing Your Finances After Graduation
It’s easy to talk about priorities and goal-setting, and another to successfully implement the practices. It’s not uncommon to go through several different approaches before finding one that sticks for you. Regardless of whether you’re a spreadsheet junkie or more inclined to let an app do the work for you, here are some tips to maximizing your financial intelligence right out of the gate.
Reduce Your Debt
Debt, especially that with high-interest rates, is a massive obstacle to financial security. While there are benefits to having and using a credit card such as building credit and utilizing reward programs, cards should not be relied on as a way to get from paycheck to paycheck. This is borrowing money you don’t have from your future self, rather than paying your future self with money you’re earning now.
Target any form of debt — student loans, car payments, and credit card balances — and try to pay them down as quickly as possible. You’ll pay less interest if you pay your debt down faster. If you have high-interest rates or student loans from multiple lenders, consider refinancing your student loans to consolidate your payments and negotiate a lower interest rate. This can be especially beneficial if you know it’s going to take you longer to pay off your debt.
Build Your Savings
Savings shouldn’t be neglected, even if it feels like you have no money to spare as a new graduate. Eventually, one of your goals should be to have 3-6 months of income set aside in case of emergency, though that isn’t always feasible immediately. While you’re dealing with the most pressing priorities you’ve identified, you should set aside at least a little money to build your savings every month and prepare for the future.
If you receive your paychecks via direct deposit, set a lump sum or percentage of each check to go directly to savings. It doesn’t have to be much; 5-10 percent or $50 can make a difference over the course of time. While you may notice a small dip in your income at first, pretty soon you’ll get used to the new amount and won’t even notice, all while building your savings! Similarly, if your employer offers a 401k program, take advantage and start contributing as soon as possible, no matter how far away retirement may feel.
Track Your Money
Keeping an account of where your money goes and what you’re doing with it is the easiest way to find out where you can save. It also allows you to look at trends over the course of several months and assess where you may be overspending or coming up short.
Creating a spreadsheet and manually entering charges every day allows for customization to track exactly what you want to. However, if you’re just starting out, or aren’t sure you’ll have the discipline to maintain a spreadsheet daily, there are apps that track spending, income, net worth, and other patterns for you. Depending on where you bank, you may have tools already available to you that you just need to set up. There are also myriad of financial tools available on the web, for everything from calculating your 401k projection to mapping out your student loan payoff.
Live Below Your Means
Once you know where your money is going, and how much you’re spending in relation to what you’re making, you can adjust as needed. One of the most important tenets of good financial habits is living below your means. If you’re consistently spending less than you make, you’ll be able to steadily pay down your debt.
When you eventually receive a raise or take a higher paying job, resist the urge to inflate your cost of living along with your salary. Continuing to live within your budget and funneling your new income to debt payments or an emergency fund will create a strong foundation without any sacrifice beyond what you’re currently doing.
Finally, budgeting is hard work. Debt is a pain. Paying back loans is no fun, and neither is saying no to Saturday night plans because you know your entertainment fund is empty. Budgeting doesn’t have to spell the end of fun, though. It’s important to make your financial choices sustainable, and that means more than just planning for retirement. In order to stick with your habits, you’ll have to reward yourself here and there.
Now, that doesn’t mean constantly splurging or immediately spending any unexpected income on yourself. When you identify your priorities in your budget, you should also identify areas that will work as rewards. Do you love trying new restaurants, but know you need to cut back on eating out? Agree to take yourself to a reasonable (not extravagant) dinner for every $500 of debt you pay down. If you’re motivated by travel, set aside a travel category that you slowly pay money into and scour the internet for cheap flights.
Whatever keeps you working towards your goals should be incorporated into your budget — this also helps reduce feelings of guilt on inevitable splurging. If you know you’ve got a treat coming up, you’re less likely to go overboard unexpectedly.
The road to sound financial planning is long and filled with inevitable mistakes. No one is perfect on their first try — especially recent graduates making the transition from college to the workforce. However, shifting the outlook from borrowing funds from the future to planning for it with today’s money will make all the difference.