Completing college and beginning a career is a heady experience. It is also a time when many people begin the process of building solid credit histories and ratings. Starting off on the right foot will make it easier to build financial security in the years ahead, and always have access to credit when it is needed for major purchases. Here are some tips that will help achieve this goal of financial stability.
Create a Workable Household Budget
The household budget serves as the foundation for all financial planning. When organized properly, the budget will provide a clear plan for paying all debts on time. Creating a workable budget is not as hard as many people think.
Begin by creating line items for each basic living need. Basic living needs include food, clothing, and shelter. In the budget, this will translate into line items for rent, each utility, clothing, and food to prepare at home. If any student loans are outstanding, the minimum due on those loans should also be treated as a basic living need.
Insurance is also an integral part of the budget. Set aside funds to cover the premiums associated with health, life, and automobile insurance.
Savings should also have priority in the budget. Identify a fixed amount that can be set aside without fail every month. Doing so helps to build a nest egg that can be used for emergencies or to make investments later on. Consider funding more than one account for maximum benefits. For example, fund a standard savings account but also consider starting an Individual Retirement Account as a way to build reserves for later in life.
Assuming that there is still some net income left, those funds can be allocated for activities that are enjoyable but not necessary. Meals out and entertainment are two examples of non-essentials that should be budgeted. Sticking with the amounts will reduce the chances of overspending and ending up with a shortfall at the end of the month.
Focus on Paying Off Student Loans
For graduates who have active student loans, paying them off must be a priority. Along with setting aside a reasonable amount each month, consider using any surplus left at the end of the month to further reduce those balances. Over time, this strategy will mean paying less interest and alleviating a great deal of financial stress.
Choose Credit Cards Wisely
One of the challenges that new graduates face is the opportunity to accept a wide number of offers from different providers. The goal is to sift through those offers and find one or two that will offer the best long-term benefits and opportunities for building a solid rating and history. This means looking beyond the special deals and terms that come with signing up, and taking a good look at what benefits the card will offer six months from now.
When evaluating the interest rate associated with an offer, determine if that is the rate that will apply going forward, or if that rate is a special introductory one that will only apply for the first few months the account is open. When the latter happens to be the case, verify what the rate will be once the introductory period expires. If that rate happens to be competitive, then the offer is worth considering.
Many card programs come with additional benefits, such as the ability to accumulate points or earn cash back bonuses. Look at the terms that apply to those benefits closely and make sure they would really result in some type of savings. For example, earning points toward the purchase of an airline ticket will not really result in a benefit unless the cardholder does travel from time to time.
Graduates should refrain from applying for too many cards at one time. The reason is that each application does generate an inquiry to at least one of the three main credit card bureaus. While a soft inquiry will not generate any real issue, a hard inquiry can have an adverse effect on the current credit rating. Research card options carefully, pick one or two that will be a good fit in the years to come, and forget about the rest.
Pay off Balances Promptly
Once the cards are activated, it is fine to use them to help build a solid rating. The best way to accomplish this is to pay off the balances when the statements arrive. Along with helping to increase the rating, this approach also allows new graduates to avoid incurring interest on balances that carry over into the next billing period. This one strategy will help to prevent incurring unnecessary debt, something that makes it easier to concentrate on that new career.
If a necessary purchase dictates that the balance carry over for a few months, have a specific plan of action to retire that debt as soon as possible. For example, if the purchase is a new computer for home use, have a plan in place to pay off the charge plus interest in three to four months. Include those payments in the household budget and make them on or before the due dates.
Pay All Debts on Time
Settling balances due on all types of obligations is crucial in order to increase a score. Along with cards and any open loan accounts, make sure the apartment rent is paid on time every month. The same goes for all utility accounts. Consistently honoring obligations on time result in additional positive feedback to each of the major agencies, and result in helping to increase the score a few points every month or so.
Adjust the Budget as Income Increases
While it may take time, the day will come when the monthly income begins to increase. As this happens, it is important to adjust the allocation of funds in the budget accordingly. Do this by looking at each line item and determine where that new income can provide the most benefit.
Many graduates find that as they enjoy increases in income, it makes sense to devote some of that money to retiring student loans faster. It is also wise to use those extra funds to increase the balances in savings and retirement accounts. For those who want to own homes someday, that additional income could be set aside to manage a down payment in a few years.
The ultimate goal is to cultivate excellent financial ratings and create reserves that ensure financial freedom. By learning to live within means, set aside funds for future use, and pay off debt quickly, it is possible to enjoy a quality of life that other people only dream about.
