College graduation is one of the most exciting times in your life. Assuming you have found a suitable job, it’s generally the time when you have more financial freedom than ever before as you jump from your college job wages to full-time career employment. A lot of new grads, however, haven’t been schooled in what to do with all that new-found freedom, so they end up making mistakes. Here are five that you should avoid at all costs.
1. Borrowing for depreciating assets
One of the biggest temptations for college grads, once they have extra income, is to get rid of the old beater car they had in college and get their brand-new or relatively new dream car. This may be exciting at first, but in the long run your finances take a double hit with the high payments and the value loss, keeping you stuck upside down in your loan and giving you less to put toward more important things.
2. Not contributing to retirement plans
Many college graduates can’t think five years into the future, let alone 45. They either don’t understand the different aspects of retirement savings (i.e. company match on 401(k), tax savings, etc.) or they would rather spend the money now. This is a huge mistake. The best time to take advantage of retirement savings plans is when you are young. Doing so enlists the power of the time value of money and keeps it working for you longer. It also gets you into the habit of saving for retirement. Too many people within 10 years of retirement are nowhere near where they need to be in order to retire at the desired time. Starting early can help you not only avoid that uncomfortable scenario, but could also enable you to retire early.
3. Ignoring insurance
Most college students today have never been on an individual insurance plan. Current legislation allows children to remain on their parents’ plan until age 26. They haven’t been taught anything in regard to how to deal with different health insurance plans, let alone life, disability, home and the other types of insurance. It’s a good time to get educated on what’s needed in order to protect your family from all the different things that can happen. Otherwise, you may end up hit by a financial disaster that can affect the rest of your lives.
4. Not taking enough risk
In light of the recent economic recession, the Millennial generation has learned a potent mistrust for the stock market. Because of this, they may be tempted to keep their savings in a “safer” place, such as a certificate of deposit or a savings account. But history shows us that although the stock market has suffered from fluctuations, at times some of them as drastic as the most recent one, it has always continued to grow over the long-term. Putting all of your money into risky investments isn’t the right way to go, but then again neither is the opposite.
With all the new financial freedom, it’s tempting to not budget because you clearly have more than you need. You rationalize that as long as you live within your means, you’re fine. The problem with this approach is that it doesn’t maximize your financial potential. Therefore the potential of what you can do for your family. If a company doesn’t budget, it can still have short-term success, but eventual failure is inevitable. The same applies to your personal finances. The only way to reach all of your financial goals is to have a plan, and budgeting is the first step to keeping yourself accountable to that plan.
It's important that when you take that huge step into full-blown adulthood, you consider the consequences of your decisions. Having fun and letting loose a little won't hurt you over the long-haul. But if you're not careful you may get yourself in a situation where you have no more room to contribute to your family's financial security.
Ben lives with his wife, Kilee, and dog, Paisley, in Arkansas. He has a passion for personal finance, sports, and learning. Ben recently started a blog at www.wealthgospel.com where you can find more of his opinions on personal finance. His life goals are to write about personal finance all day and start a non-profit organization to help others become self-reliant and to find their true potential. On any given day, you could find him eating homemade salsa, picking blackberries, or staying up until 3 a.m. to finish a book.