By definition, graduation is a state of transition and students no longer are students in the typical sense. It’s easy to make financial mistakes during this transition, and they can create serious problems later in life. Here are some of the common questions students face while in this transition and how to deal with them.

I’ve just graduated. What should my first financial planning priority be?

There are a lot of options for those first few paychecks. Some experts will tell you to invest in a retirement fund or to focus on paying your debts. You may have different ideas, too, like saving for a car, a wedding or a house.

The No. 1 cause of financial struggle is sudden and unexpected expenses. The easiest way to avoid these problems is to build an emergency fund. If you have a sudden windfall from graduation presents or tax refunds, use it to start a short-term savings account. This fund should be in an interest-bearing account such as a money-market, savings account, or a free Tyndall Smart Checking account.

Making these investments and financial planning should be your first priority. Make minimum payments on your other debts and keep saving until you have at least one month’s living expenses saved. This savings is how you avoid getting into more debt. Avoiding new debt is the biggest step toward getting out of debt and moving toward financial security.

Should I focus on getting out of debt or financial planning for retirement?

The answer to this question depends upon what your short-term goals are and what kind of debts you have. If you’re planning to buy a house or car, or start a small business, you need to lower your debt use percentage. This will get you a better credit score and ensure that you can get cheaper access to credit for these activities. If you plan to go to work and don’t mind putting off buying a home, then the paying off debt and investing are equal. This being the case, you need to think about the kind of debts you hold.

For subsidized student loans, the interest rates are lower. You can likely earn a higher rate of return than that with an IRA or other long-term investment. For private loans, the interest rate will vary based upon when you took out the loan and the kind of loan. These may have higher interest rates, which would be close to the return on an IRA.  Paying down this debt is far more important to building long-term financial security. Be sure to also take advantage of making payments with no interest while the Department of Education has extended Covid-19 relief efforts for student loans.

Remember, in making this decision, financial planning for retirement is more about time in the market than principal. Starting your investment early is the best thing you can do to provide for your financial security. You may need to strike a balance between paying for your past and saving for your future.

What’s the biggest mistake to avoid?  

The biggest danger facing new graduates is “lifestyle inflation.” Every product that’s advertised becomes the solution to all life’s troubles. A 60-inch television would make your evenings more enjoyable, which is how you justify spending those extra funds on it. It does provide a measure of happiness for a few weeks, but you get used to it in a short period of time. Then, a new reclining couch or a sports car becomes the answer. Spending experts call this the “hedonistic treadmill.” It most often happens right after getting a new job that brings a bigger paycheck.

The best way to avoid it is to create a budget planner and include some room for luxury expenses. You can spend it every month on dinners out, concerts or other items. You can also save it in a short-term savings instrument for a bigger splurge. Building space into your budget for this kind of spending can help keep you from feeling “entitled” to expensive luxuries and overspending.

This is the beginning of one of your biggest adventures. Entering into it with financial know-how can not only make your future brighter but create a path to financial freedom from the start. Congratulations Graduate on this big accomplishment!

Would you like to learn more about Financial Wellness?