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The Five Biggest Financial Blunders New College Graduates Make - And How to Avoid Them

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Every new year brings a fresh new crop of new college graduates, young people who leave the classroom behind in search of a better life and a great career. If you are among the many thousands of college graduates hitting the stage this year, you need to prepare for the financial challenges ahead.

When it comes to making financial decisions, what you avoid can matter as much as what you do. There are some financial blunders that can leave you behind from the start, and avoiding those mistakes is an essential part of starting life as an adult.

Mistake #1 — Putting Off Retirement Savings

With so many bills to pay and a brand new life to build, retirement can seem like a million years away. For the new college graduate, retirement is actually three to five decades away, and that is not as long as they may think.

When it comes to retirement savings, getting an early start can have lifetime benefits. Workers who start saving for retirement in their 20s can put aside far less per month than those who wait until their 30s or 40s. That means a smaller investment, more discretionary income and more money to have fun with.

One of the smartest things new college graduates can do is sign up for their first employers’ 401(k) plan. Putting money aside in a 401(k) plan reduces current income taxes, and the money will have decades to grow before it is needed.

Mistake #2 — Being Afraid of Risk

It is easy to see why today’s college graduates are so worried about risk, especially the risk inherent in the stock market. These are the young people who came of age during the Great Recession, and they were firsthand witnesses to one of the fiercest bear markets in history.

Even so, the risk of stock market losses is not the biggest danger college graduates face. Playing it too safe could mean stashing cash in low-yielding CDs and savings accounts, and that strategy could mean less buying power with every passing year. By the time those newly minted college graduates are ready for retirement, they could find themselves woefully unprepared, with savings that fail to stretch as far as necessary.

Mistake #3 — Not Having an Emergency Fund

Life is filled with unexpected events, some small and some large. Living without an emergency fund means tempting fate, and eventually fate will win out.

No matter how tight their budgets, new college graduates should work hard to build an emergency fund. The size of the ideal emergency fund will vary, but many financial experts recommend stashing away a minimum of six months of living expenses.

Mistake #4 — Failing to Budget

Not having a budget is a major mistake, and this blunder is not confined to new college graduates. A surprising percentage of working-age adults, and even some retirees, never got around to budgeting, and they could be poorer for it.

Having a budget provides a number of separate but interrelated financial benefits. For starters, knowing where the money is coming from and where it is going gives young (and not so young) people a sense of control, something that can make financial planning easier.

Having a budget in place also makes it easier to find money leaks, something that could potentially free up hundreds of dollars a month for retirement savings, emergency fund building and other priorities. Those small expenses can really add up over time, and seeing them in black and white can be quite an eye opener.

Mistake #5 — Keeping Up with Their Peers

Keeping up with the Joneses is always a dangerous thing to do, and the habit can start early. Many young people see their peers going out to dinner at fancy restaurants, embarking on overseas vacations and spending lavishly on gifts. While it may be tempting to ape their behavior, a little bit of restraint will go a long way.

There is nothing wrong with an occasional splurge, and new college graduates should not become hermits or misers. If those new college graduates want to enjoy a successful future, moderation is the watchword. The budgets they create will help guide their purchases and keep them on the right track going forward.

New college graduates face a number of challenges as they move from the relative safety of the classroom to the harsh realities of the real world. Many of those challenges are financial ones, and avoiding common mistakes can be as important as knowing the right moves to make. Some financial blunders are more common than others, and five of the biggest are outlined above.