As high school and college graduations are behind us, for many graduates the reality of the world is at their doorsteps. Many of them will be leaving the safety of their parents’ nest and for the first time, starting their own household. Although, it is wonderful to start receiving a paycheck, most peoples’ initial inclination is to reward themselves by buying some of the things they have putting off. Unfortunately, it shouldn’t work that way. School may have taught the graduate many things but one area that school, whether high school or college, does not teach well is in regard to personal finance. I cannot stress enough how important this area is. After all, if you make mistakes regarding your personal finances, you may find that it takes years and years to dig yourself out. Therefore, it is important to get off to a good first step.
My recommendation for a new graduate is to first take stock of where you’re starting from. What are your assets and your liabilities? If you have outstanding debt, you need to know what the interest rates are, what your payment is and whether you’ll be able to deduct the interest or not. It is important to remember not all debt is the same. For example, a charge card debt where you’re paying 18.5 percent and is not tax deductible, is different than a 4.5 percent mortgage that is tax deductible. Therefore, as far as I’m concerned, the first step along the way is to take stock of where you’re starting from.
The next step I would recommend is to establish a budget. Most people believe a budget is meant to restrict your spending. I on the other hand, believe that a budget allows you to spend money knowing that you can afford what you are purchasing. Unfortunately, for people who are just starting off and don’t do a budget, they won’t have that comfort and will tend to overspend.
In establishing a budget it is important to pay yourself first. What I mean is that you starting saving for your retirement. For those who are just starting out in their careers it is doubtful they will have pensions and whether they will have Social Security is up in the air. That is why I always tell people the day you start working is the day you start saving for your retirement. Every year you don’t save for your retirement means you will delay your retirement for at least a year. I recognize saving for retirement, which for many people may be 40 years down the road, is difficult; however, let’s face reality, life is difficult and it will be even more difficult for someone who does not take care of their finances.
In our society it is easy to spend money. The hard part is to be responsible with money. For many graduates this is the first time in their life that they will have disposable income. The temptation is to take that disposable income and spend it. What I encourage people to do is to be more responsible. Establishing a budget and living by it is responsible.
A budget is not a document you do once and forget about. Rather, it is something you constantly need to adjust to fit your revolving situation. A budget is a living document which means it should change with you.
Once again, congratulations to those who are starting their careers and entering the real world. I wish you the best of luck and I strongly encourage you to take your personal finances seriously. Not only will it help you today, but it will also help you for the rest of your life.