Class of 2022, as you head further into the world, you'll face a variety of financial decisions, big and small. Buying a car, securing your first home, and obtaining a great credit card are all major achievements made possible by focusing on your personal finances - sooner rather than later.
Your credit score, budgeting skills, and debt all play a role in when you will achieve these financial milestones. Managing your finances early allows you more freedom to achieve large financial accomplishments down the road.
We've gathered a few personal finance tips to help you learn how to manage your money.
Create a budget. Budgeting is a large component of setting yourself up for financial success. Adhering to a budget might not be enjoyable now, but when you are driving down the interstate in a car you worked hard to purchase, you'll be happy you chose to be smart with your money.
Generally, you want to divide your income three ways: save 20%, spend 30%, and use 50% on essentials. Building your savings creates a safety net in the event of an emergency. Nonessentials are not completely off the table, but shouldn't take up more than half of your income. Lastly, essentials such as rent, your car payment, or health insurance should take the majority of your earnings. It's wise to stay as close to this guideline as possible, but adjust as you see fit to avoid putting yourself into more debt.
Use credit wisely. Having a great credit score is necessary for many of the financial tasks that are coming your way as a new graduate. A credit score is a rating that financial institutions look at to determine how likely you are to pay off your debts and is determined by the following factors:
- Payment history - Lenders want to know whether you've paid past credit accounts on time. This is the most important factor when considering your score.
- Amounts owed - If you are using the majority of your available credit, this is an indicator to credit issuers that you may be overextended and at high risk of defaulting.
- Length of credit history - A longer credit history is positive for your score, but is not required for a good credit score. You may want to think twice before you close your oldest credit line.
- New credit - Opening several accounts in a short period of time represents a greater risk.
- Credit mix - Scores are considered using a mix of credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans.
In general, it's best to borrow only what you need, shop for the lowest interest rate and fees, and never let anyone persuade you into getting something you don't want. If you don't make a payment every month, you may fall behind and potentially ruin your credit. Credit is similar to grades in school - easy to drop but hard to improve.
You can keep track of your credit score through a credit monitoring service like My Credit Score, available to members through Online and Mobile Banking.* Sign up for this free service and enjoy real time access to your credit score and see what changes month-to-month. Simply log into Online or Mobile Banking to get started today!
Student loan payments. According to Forbes, the average borrower owes $28,950. Although new graduates with federal student loans are given a grace period of six or nine months before they are expected to make their first payment, this is still a hefty number regardless. Creating a well-thought-out plan with your budget in mind is the most ideal way to guarantee financial success.
If you have extra money to spare and choose to prioritize loan repayment right away, you may want to consider trying the waterfall method for paying off your debt. With this plan, you start by paying off the debt with the highest interest rates first, like private student loans, and then work your way down to debt with lower interest rates, like federal student loans.
Consider establishing monthly payments on your student loans to help pay your debt faster. Because interest continues to build, even while you are in your grace period just after graduation, making payments can help knock out this debt more quickly. If you cannot afford to pay your full monthly payment, consider putting some money toward reducing the interest during this time.
If you are unable to make a payment without breaking the bank, deferment and forbearance plans temporally halt your payments. Keep in mind, forbearance continues to accrue interest, while deferment does not. An income-driven repayment plan requires you to pay a certain percentage of your income, which could make your monthly payments more manageable, but specific eligibility requirements apply.
As a recent graduate, navigating the world with new financial responsibilities and obligations is challenging enough. Adding the stress of rising interest rates and the unknown of where you may be in five years doesn’t make it any easier. By starting your financial journey early, you're setting yourself up for financial success now and in the future.
*Terms and conditions are available through Online Banking and must be agreed to before using service. All of our Mobile Banking products require an Online Banking login, a data plan with a wireless provider, and in some cases, enrollment into Bill Pay. South Carolina Federal Credit Union provides Mobile Banking as a free service. Consult your provider for any fees associated with your mobile web service.