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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Why I’m Happy To Loan My Tax Refund to the Government

Uncle Sam empty bank (due to tax refunds!)“If you get a tax refund, you just gave the government an interest-free loan!” I seriously can’t count how many times I’ve heard people say some variation of that phrase.  You’ve heard it, too (or maybe you’re the one that said it to me).  It’s technically true. But obviously people who say this really haven’t run any math on that to see how insignificant the interest can be nor have they considered any other implications.

Let’s examine the impact that going a year without my refund had on my finances this year.  I received a tax refund of $900 for 2010.  Assuming that I placed an equal portion of this each month (which is $75) into a savings account each month and my deposits earned a generous 1.5% APY (note: I currently get 1.0%  on ING), I would have earned a whopping $7 of interest by the end of the year (which is, ahem, taxable).  Geez, looks like one less burrito at Chipotle this year.

Math aside, you could also point out that you had to wait to get the rest of your money, interest or not.  The $900 is sorta a big deal to me (it’s currently almost a full month’s pay).  But what if I screwed up my withholding and I suddenly owed $900 in taxes?  This can easily happen if you get a big pay raise mid-year or change your allowances on your W-4.  As Ramit Sethi points out, many who would owe this amount of money at tax time wouldn’t have the cash to pay their taxes.  This would definitely put a strain on my finances.  There’s potential to create a real mess with the IRS and that’s far more of a pain than whatever reward that would  .

Moving on from interest and waiting, it’s just plain fun to get a bunch of cash all of a sudden that you didn’t really have to do anything more to earn.  I don’t plan ahead for when I get my tax refund, and I don’t know how much it’s going to be.  But when I get the refund, I treat it a bit like a reward (while still being careful how I save/spend it).  This lump sum is much more beneficial to me.  I obviously survived the year without that $900.  If that $900 had been spread over every paycheck, that would’ve only been an extra $35.  I would’ve easily squandered that on one or two meals at a restaurant.  But by getting the refund as a single, large payment, I can do something much more significant with it.

This year, my refund (after I added to my emergency fund) covered my airfare to my upcoming trip to Spain.  There’s not any other easy way I could have come up with this amount of cash by trying to save or skimp throughout the year.

While it is fun to get one, I’m definitely not suggesting you just squander it.  I really like knowing that I have money that I can just put into savings or other places that I can’t always afford.

Perhaps there’s something meaningful that you pay for, too.  You could use your refund to tackle credit card debt.  Throwing a few thousand on that fire could go a long way.  Either way, I hope the tax refund haters out there will get over all the “free government loan” fussing.

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photo by: Infrogmation