As a new college grad, saving any money may seem like a far-off pipe-dream. We are here to tell you that saving is possible for just about anyone. Saving takes diligence - and sometimes means making sacrifices - but a little bit can go a long way in helping you reach your goals.
Here are some common reasons to save money as a new college graduate:
- Emergency Fund - What happens if you need a new transmission on your car, or you break your leg and are out of work for three weeks? Do you have a plan if you lose your job or work on an hourly wage and are sick with the flu for a week? Having 2-3 months worth of savings (at least!) in a liquid savings account (that means easy to withdraw, if necessary) is a wise plan for circumstances that are unplanned. And remember, setting aside money for your emergency fund should be at the top of your list. Always pay yourself first!
- House Fund - The age-old American dream is to own a home. Typically, you need to put down a sizable down payment in order to buy. 20% is standard but there are programs for first-time home buyers that may only require 5-10%. Let's say you are buying a house for $200,000. Even a 5% down payment would be $10,000. If you aren't earning a whole lot, it means it will take more time to reach that goal, which is why you should start saving now.
- Travel Fund - Maybe home ownership isn't one of your goals yet, but let's say you want to travel to Thailand for two weeks. That is going to cost you some money. Sure, you could put it on your credit card, but we assure you that you will regret it when you are paying 20% interest on those vacation expenses. Instead, you should save up for your travel plans.
- Retirement Fund - Ha! You just started working; how could you possibly be thinking about retirement?! It may seem like it is in the very distant future (and it is), but the more time your savings have to grow, the bigger they will be when you need them. It's particularly wise to take advantage of retirement saving if your employer has a matching contribution plan. It's like getting a raise without all of the negotiating!
So, we've convinced you saving is a good idea. Now you need to come up with a plan. Here is what to do:
- Set a savings goal. Write it down. If its a big goal that will take a long time to achieve, set milestones you can celebrate along the way.
- Choose a specific reason to start saving your money (vacation, new car, emergency fund). Write it down with your goal. Every time you make a purchase, remind yourself of your goal. How will that purchase affect your ability to attain it?
- Create a timeline for your goal. If you want to save $10,000 in ten years, plan to save $1000/yr or increase your savings incrementally each year, like year one you save $500 and year two $750 and so on. Divide your annual goal by 12 to determine how much you need to set aside each month.
- Create a budget. Use the 50-30-20 rule if you are new to budgeting. Basically, it goes like this: 50% of your income should cover living expenses and essentials (rent/food/utilities/transportation). 20% of your income should be used to meet financial goals, like paying down debt (like those student loans!) and savings. The last 30% of your income should be used for flexible spending, like entertainment or clothing. This is stuff you don't necessarily need, but makes life a little better. Monitor and adjust as needed, but remember to pay yourself first! That means you want to put some of your earnings in savings each month right away so you aren't tempted to spend it. Ask your employer to direct deposit a portion of your paycheck directly into a savings account if that is a possibility.
- Find extra money in your monthly budget by cutting costs. Make budget friendly meals instead of eating out. Stay in with friends and play cards instead of hitting the bars. Buy clothing second-hand when you need it. Live with a roommate and your rent and utilities will immediately be cut in half. Cancel the cable. Make your own coffee. Change your phone plan. Look into any way you can cut just $5-$10 each month. Small amounts add up quicker than you think.
- Let your money make money. It is wise to keep some savings in an easy-to access account for emergencies. But these savings accounts typically earn little to nothing. If you want your money to make you more money, look into investment accounts such as CDs and money market accounts that will earn you some interest on your savings, compounding your efforts.
Refinancing your student loans could be a great pathway to reducing your monthly payment obligation or could potentially save you thousands of dollars in interest charges over your repayment term. But, refinancing isn't the right option for everyone. To learn more about refinancing and the pros and cons, download our Student Loan Refinancing Guide.