April 11, 2011

After Graduation: Spending Your Newly-Pocketed Money Wisely

After graduationThis post is part of an “after college” series for the launch of my upcoming free ebook “Money After College.”  You can sign up for my email list to receive your free copy when it’s released in early May.

After graduation is an exciting time, emotionally and financially.  You (hopefully) already have a job lined up where you’ll earn more than you ever have in your life.  Perhaps you’ll also receive cash gifts as a graduation present from friends and family, too.  Life is great as you embark on a whole new journey in life. But, let’s come back to earth a bit before you go out right away and grab all the stuff you’ve worked your way through four years of college to get.  After all, you haven’t hit the big time yet.

I’ll admit that I’ve been guilty of going out and spending right after finishing my first four years of college.  I bought a new HDTV and PlayStation 3, which cost me over $1,000 combined.  I also bought some new clothes and other things to “reward” myself.  Before I knew it, most of my graduation gift was gone.  Here’s some tips to avoid the same mistakes that I made.

Resisting big spending mistakes

– Don’t spend money just because you can.  This little blip of income in your life is going to disappear quickly, especially if you start spending money before you’ve earned it.  Before you start spending wildly, realize that just because you’re earning a few hundred bucks a week doesn’t mean that’s all fun money.

– Ask yourself “Would this purchase make sense if I was still in college?” If you were like most college students out there, you probably didn’t have too much money to go around.  You might have eaten ramen or drank Natty Ice (or both, simultaneously) and hope to never have to go down that path again.  Even though you might not want to live like like a pauper any more, you should try to maintain that lifestyle for as long as you can.  It will help greatly in your ability to pay down college debt and save for retirement.

– Plan your purchases wisely. Don’t buy on impulse. I enjoyed my PlayStation for about a year before I got tired of it and ended up selling it (for about half of what I paid originally).  I regret that purchase and would much prefer to have that cash in my savings account right now instead.  If you are planning on making any large purchases (> $100), think about it for at least a few days before buying.

– Don’t go out and buy the brand-new fancy car. Yep, this one gets it’s own section.  I’ve seen it so many times.  If you’re trying to recover from four years of loans (and potentially credit card debt), buying a new car is one of the worst decisions you can make.  If you do need a car, purchase something a few years older that will cost a lot less.  There are lots of benefits of owning a used car.  If you’re living in a metro area where there’s public transportation, Zipcar, or bike access, you might not need to own a car at all.

– Allow yourself a few nice things that you’ve been waiting to buy.  I think all life victories deserve celebration.  Graduating college is probably your biggest accomplishment at age 22, so it’s certainly no exception.  Treat yourself to a nice night out for dinner, a DVD or two, and a book to further help you plan your finances (I recommend Ramit’s I Will Teach You To Be Rich).

– Save some money and start paying down any debt.  Trust me, loan payments are coming at you fast and you’re not going to enjoy it.  If you don’t have loans, there’s going to be a time in the future when you need this money and can use it on something better. Save as much as you can, and you’re making a great decision.

3 Easy Steps to Start

In 3 steps, here’s what I’d do with the first $1,000 after graduation (gifted from family/friends or earned at a job):

1. Have fun with $200.  Do whatever you want with this.

2. Put $300 in the bank in an ING Savings account.  Save this for an emergency or some other important expense in the future.

3. Open a Roth IRA and deposit the final $500 in this account. Research index funds and start investing.

This is a fantastic foundation, which you can build on with a more sophisticated savings and investing strategy.

If you’re about to graduate, how do you plan to spend?  If you’re past graduation (like me), do you have any advice?

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photo by: Werwin15

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February 23, 2011

Living In the Present With Your Finances

I’ve always aspired to “live in the present” since reading Eckhart Tolle’s The Power of Now. The basic premise is that one should not dwell on the past or the future but simply enjoy the present moment without worry or anxious anticipation of what is to come.  The concept that  stood out to me the most was that one should only concentrate on the problems that can be dealt with at that very moment.  Money-related issues are just as applicable as anything else to these principles.  Here’s my take on the past, the future, and how those impact decisions made in the present.

Learn from the past

We’ve all done things we regret.  That’s perfectly fine, just do your best not to repeat.  My initial thought (and maybe yours, too): where do I begin?!  I’ve made some foolish money-earning decisions in the past.  One summer, during college, I was unemployed and broke.  It was the worst summer I can remember (even worse than when I worked 6 days a week, starting at 5:30 am).  But I learned this from it: I always need to have “work” to do, not just for income, but also to keep motivated and feeling as though I have a purpose.

I’ve gone through credit card debt problems, but I’ve vowed never to go down that road again. I’m actually glad that this happened earlier in life.  I learned quickly how frustrating and difficult dealing with credit card debt can be. Now that I know what it’s like, I’m much more careful with how I manage and use credit.

But definitely repeat the good decisions you’ve made.  Buying a used car (apologies for writing about cars so much lately) tops my list.  It’s been cheaper to own, and my quality of life hasn’t suffered one bit versus buying a new car.  I’m also thankful that I avoided loan debt through college, and I hope to stay out of debt of all kinds whenever I reasonably can.

Look to (but don’t live in) the future

Live on what’s in your bank account, not what you’re expecting to be there. Be cautious with credit cards and spending money you haven’t been paid yet. While I do not carry a balance on my credit cards month-to-month, I’ve run into times where I spend on my credit card before I receive my direct deposit.  This is the wrong approach.  I should be making the money first and then spending it.  Fortunately, I receive a salary for my job, so there’s never any doubt of if I will get paid or not. But it’s definitely a tough cycle to break.

Don’t spend based on future fortunes you think you’re going to make.  This is an easy pitfall for anyone but especially those still in college.  The attitude is “I’ll live it up now and pay for it when I make that fat paycheck later.”  There’s a few problems with this.  First off, you don’t make the big bucks yet.  You can dream all you want, but until you are actually pulling in that amount of money, you shouldn’t be spending it.  Secondly, paying back the debt won’t be fun.  With crazy high interest rates, your debt will increase at a rapid pace.  While you may look back on that time of spending fondly, you’ll surely wish at some point that you hadn’t racked up all that debt.

But do save for the days to come.  This goes with the last point.  It’s actually the exact opposite.  Instead of spending more than what you have at the present moment, you should be spending less than what you have and saving for the future.  The last point involves living in the future, which I don’t condone.  But smart planning is always okay.  You should be prepared for the unexpected with emergency funds and for retirement with investment accounts that are funded regularly and adequately.

There are a lot of emotions tied to our past experiences of money and our anticipation of a better financial future. But the most importance lies in the decisions that we make right now, in the present, since those are the only decisions that can truly shape our future.

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photo by: iamliam

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