It is extremely exciting to transition from little to no income in college to solid adult income with a 9-5. At the same time, it’s really scary since we are taught little to nothing about managing our finances.
Unless you took a personal finance class in college, you were very likely taught nothing in regard to how to manage your money after college. Let’s fix that.
Zero Income Gap
Most grads, including myself, have a gap between graduating and actually starting a full-time job. This could be a quick one-month respite or a year-long hiatus. I can personally speak more effectively on the quick break as this is what I went through.
If you have a short gap of no income, it’s really about minimizing costs. Assuming you worked either very low hours or low pay during college, you likely won’t have a nest egg to lean back on. Instead, we will have to be as efficient as possible with what we do have.
- Live at home. Rent is most people’s largest expense. Making that zero or near zero has a huge effect. Today, there is a general negative outlook on living at home in America. Realize that this is really not fair. If your family is willing and able to help out in that manner, you will have a massive leg up on someone living on their own.
- Share a car. Though you may understandably crave the independence of a car, that independence comes at a cost. Having access to a car for food and occasional around-town trips is plenty for a short period of time.
- Stay on family plans. This could be a cell phone, internet, health insurance, etc. Even these seemingly small expenses eat into your savings quickly without any income. Avoid them if possible during this period.
- Save money. Though it is more obvious, it is important to spend as little money as possible during this period. Don’t worry, you can go back to living a life with coffee and Grubhub once we get past this gap.
Of course, all of these are assuming the privileged situation of having parents/family that is willing and able to help you during this time. If not, the focus is entirely on saving money.
A large gap, often a “gap year”, between graduation and a full-time job is a popular choice for those looking for a break from constant commitments. There is nothing wrong with this decision, but it does come with more requirements financially.
If you are fortunate enough to have a significant amount of savings either from additional work during college or parent assistance, it may not be too bad. Reduce costs where you can, and otherwise make use of your relaxing time before starting your job. For most of us, this isn’t the case. Instead, the best two options are:
- Significant help from parents
- A part-time job
Significant help from parents is a massive privilege, but a great choice if possible. Many parents are actually happy to have their child stick around a bit longer. Of course, never take advantage of the generosity of anyone, including your parents. Understand their offer to assist you likely only includes a place to stay and home-cooked meals. But to be honest, that’s more than enough.
A part-time job could be a traditional position like a part-time waiter, or even a freelancing side hustle like a social media manager. The huge upside I see to the part-time job option is that it could even turn into more over time, freeing you from the need for a traditional 9-5. Now I understand a part-time job isn’t exactly what most people look forward to in a gap year. But it may be what has to be done. Committing 20 hours/week to a remote job isn’t always a horrible situation. Heck, you might even enjoy it.
Beware Lifestyle Inflation
Ok so now let’s assume you have gotten a full-time job of some sort. You’ve gone from zero or very little income in college to an adult’s income in the real world, maybe even more. It’s incredibly exciting and rewarding. Let yourself feel proud of your accomplishment of graduating and landing a job.
However, don’t let this pride turn into rewarding yourself with luxuries that you can now “afford” that you previously couldn’t. You can “afford” a $500 / month car payment on $550 / month income. But we would all agree that is an unsound financial decision.
Let’s say you made $1,000 / month at a part-time job in college, and you spent $100 / month on clothes. Now let’s say you graduate and land a solid job quadrupling your pay to $4,000 / month. Should you quadruple your budget on clothes to $400 / month? Technically you would still be spending the same fraction of your income on clothes, but it is an unnecessary increase.
This is where lifestyle inflation comes into play. Many people think that an increase in income means you deserve an equal increase in lifestyle. If you work hard to get a raise, promotion, or higher-paying position, that is fantastic. Reward yourself in some way with a dinner out with friends or even a small trip. But don’t fall into the trap of committing yourself to increased expenses.
There are many examples out there of people climbing the corporate ladder and earning well over six figures, but still struggling to save at all. For many people, this is because with every pay increase came increased expenses. A shiny new car, a bigger house with a view, moving into a more expensive neighborhood. These are the most common examples of lifestyle inflation.
Instead, allow yourself a few one-time rewards to celebrate the occasion, and leave as many of your recurring expenses where they were. This will be powerful as you will save more as you earn more. Assuming your goal is retirement or financial independence, this is one of the most powerful things you can do.
If you want to learn more about how to save and what to do with those savings, check out my post Build Wealth in Just 3 Steps.
Manage Your Expenses
It is important to have a general guideline for setting up your expenses. Attempting to build wealth is hopeless if you have no clue what and where you should be spending.
During college, many of us fly by the seat of our pants (pretty certain that’s a saying) with our expenses. Money comes a few times a year in the form of refunds from scholarships, financial aid, or parents. Expenses are controlled with vague attempts at not spending too much on food that month.
Now, with greater income and responsibilities post-graduation, a financial plan has become vital to building wealth or even just getting by.
A solid rule of thumb is the 50-30-20 rule.
- Needs generally include rent, food, utilities, phone plan, etc. Recurring expenses that you have no choice but to include.
- Wants is self-explanatory. Go nuts. Just don’t forget to include budgeting for periodic splurges such as vacations. If a vacation 5 months from now will cost $500, budget an extra $100 / month in the wants category to pay for it.
- Savings are where the real magic happens. Let me explain.
Saving is not simply stuffing money under your mattress like a doomsday prepper. Saving is any money that is held onto or used to invest in something that you expect to give you future returns. Examples of this would include:
- Rainy day savings/emergency fund
- Stock market investments
- Retirement contributions such as your portion of a 401K match or contribution, Roth IRA, etc.
- Investments in yourself. This could be any purchases that improve your ability to make money. An online certification course to get a better position or raise. A writing course to become a better writer. This one is more up to your discretion and is constantly overlooked. You are your biggest asset, and assets need investments to grow.
No rule is perfect, and everyone’s situation is unique. I recommend analyzing your last month’s expenses and seeing what percentage you are currently at. Then review any troublesome categories and attempt to cut out any unnecessary fat on purchases and move those into investments. Without making yourself an emotional wreck, aim for the 50-30-20 rule at a minimum.
If you are able to increase the savings and decrease either of the expense categories past the 50-30-20 rule, have at it. This is never a bad thing and your future self will thank you.
One note. This rule of thumb is built for saving toward traditional retirement. If you are looking to retire earlier, these ratios likely need to be shifted unless you are making a butt load of money. It all depends on your timeline, but it’s not uncommon for those seeking early financial independence to aim for 40% savings/investments.
If you are interested in tracking these ratios for yourself, I have developed a free downloadable spreadsheet available via the button below or here. It is automated and allows you to track your current ratios and set goals for yourself.
For more info on what financial independence is and how it can improve your life, see my post What is Financial Independence?
Start a Rainy Day Fund
Now that you have some decent income and savings are building up, it’s time to structure those savings.
A goal to aim for is to have all of your savings contribute towards a rainy day fund. This rainy day fund should consist of at least 3 months of expenses.
Let’s assume you are contributing 20% of your monthly income to savings by following the 50-30-20 rule. Each month, you are saving 1/4 as much as you are spending, since 20% is 1/4 of 80%. So after four months, you would have one month’s expenses saved up. After one year you will have three months of expenses saved up.
This fund can be used to cover anything from medical emergencies to a gap in work when transitioning to a different job. This peace of mind is vital to being able to focus on building wealth without exposing yourself to too much risk.
A rainy day fund is important because investments are not as liquid as cash savings. This means that investments cannot be turned into cash to cover other expenses. A rainy day fund is your plan B and will cover most random expenses that pop up.
Once you have tapped into a rainy day fund, make sure to immediately switch back to prioritizing building it back up to where it was. If it was severely depleted, you may even consider liquidating some of your investments to bring back that peace of mind.
Invest in the Stock Market
Once your rainy day fund is set up, we need to do something with the additional savings each month. The easiest and most accessible option in my opinion is the stock market.
The stock market has a very low barrier to entry and can build wealth extremely passively. I have many posts covering the stock market, so I won’t spend too much time going over it here.
Investing in the stock market as early as possible is a game changer. The stock market is all about compounding, and compounding loves more time, even just one year extra. At $200 / month, with a 7% return over 35 years, one additional year earns you an additional $23,224 on top of your $2,400 contribution that year (source: investor.gov). Start now, even if your contributions seem ineffectually low.
First off, you need to select a brokerage. A brokerage is an entity that allows you to use your money to purchase shares of stocks on the stock market. I have an entire post going over The Five Best Brokerages for You.
Once you have signed up for a brokerage, it is time to purchase stocks. With modern brokerages, you can purchase very small fractions of shares, all the way down to $1. This makes it dead easy to get started no matter how much money you have to put in. Stock picking sounds very scary, but it doesn’t have to be.
If you are looking to invest as passively as possible, VOO is a fantastic option. VOO is an index fund that essentially tracks the overall market and automatically diversifies your portfolio. Sticking to VOO simplifies your investment process while still getting access to the wealth-building potential of the stock market.
Many people including myself choose to attempt to maximize our investments by investing in individual stocks, or with a mix of both. Individual stocks have the opportunity to give higher returns than the overall market, but no guarantee. Selecting which stocks to buy takes more time than simply buying an index fund like VOO, but it doesn’t have to be outrageous. I go over key information in my post on Buying and Selling Stocks.
For a more in-depth introduction to the stock market as a whole, check out my post What is the Stock Market?
Start a Side Hustle
Starting a side hustle does not have to be a 24/7 grind like many make it out to be unless you want it to. For many people, a side hustle is just something to put an hour or two in a day. Even with this seemingly small amount of time, a side hustle has huge upsides:
Having a single source of income, likely from a day job, exposes you to some risk. Namely, if you get fired or laid off for some reason, your income is now zero. If you have your rainy day fund set up as we talked about above, then you should be okay. But, it’s still not an optimal situation.
Instead, if you had even a small side hustle bringing in a relatively small or even significant amount of money each month, that would alleviate a lot of financial tension. Paying for food or rent for the month covers a lot of your expenses.
When most people fill out their resumes, they have a section for skills. Their skills will likely cover standard skills gained through their jobs, maybe with a few skills gained from outside courses. There is nothing wrong with this, and it will get you many opportunities.
However, having a skillset from an entirely different field can give you a massive leg up. If you do freelance writing on the side, you can add professional writing to your list of skills. Or if you do graphic design, this may show as a very unique skill on an Engineer’s resume.
Though your side hustle skills may not seem applicable to the position you are applying for, it’s all about becoming indispensable. No, graphic design may not help you be a lawyer directly. But, if they see you are a graphic designer, they may ask you to help out with their logo or advertisements. You have now further engrained yourself in the company, making it more painful for them to get rid of you.
A diversified skillset is arguably even more useful outside of a day job. These additional skills allow you to completely switch careers if you so desire. Having a side job as a blogger while you work as a phlebotomist may allow you to become a full-time copywriter eventually. In my opinion, the key to finding success in this world is putting yourself in a position to take advantage of any opportunity that presents itself.
Of course, the increased income from your side hustle will increase your wealth faster. If your goal is early retirement, a side hustle is almost a necessity without a massive paycheck from your day job. Even with a goal of standard retirement, a side hustle will allow you to retire more comfortably.
When it comes to managing finances after college, it isn’t about being perfect. Don’t put pressure on yourself to make the perfect decision at the perfect time. What is important is to avoid analysis paralysis and make a decision at all. Those who make decisions and try things get much further than those who sit and wait for the perfect opportunity.
Good luck starting your new life outside of school. Feel free to contact me or leave a comment below if you have more questions about my personal journey post-graduation.
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