By Rich Ramassini, CFP®
As a new college graduate, you are about to embark on an exciting rite of passage: starting your career. It is an empowering, scary and thrilling time. You are taking an important step toward financial independence: bringing home a regular paycheck and facing choices about how to spend your money. Perhaps you feel overwhelmed about how to budget your money correctly. There is no better time to learn these good financial habits:
1. Reset Lifestyle Expectations
A lot of recent graduates enter the workforce expecting to live the same kind of lifestyle they had growing up. However, chances are that lifestyle was much more expensive than you realized and it may not be achievable at your current salary. (For more, see: 5 Financial Mistakes New Graduates Must Avoid.)
For now, you need to adjust your lifestyle and reduce your spending because you probably are responsible for certain expenses that you weren’t in the past, like insurance, car payments and housing. If you don’t make adjustments, you may make decisions that you can’t afford.
2. Establish a Positive Cash Flow
In a nutshell, you should spend less than you make. There’s a general rule of thumb when it comes to debt-to-income ratios. Your debt (housing, credit cards, student loans, etc.) should be less than 36% of your gross income (your total income before taxes). Of that number, your housing should be no more than 28% of your gross income.
For example, let’s say you make $60,000 per year. Using the formula above, your monthly housing payment should be less than $1,400 per month. Your total debt, which includes housing, loan payments, etc., should be less than $1,800 per month.
3. Establish an Emergency Fund
Once you’ve taken control of your debts and feel comfortable with your cash flow, make a goal to contribute a set amount to an emergency fund. Even if you can only contribute a few dollars each week, it’s important to establish the habit. The goal is to build an emergency fund that will cover three to six months of your living expenses. (For more, see: 5 Advantages of Investing in Your 20s.)
Establishing this emergency fund early on in your career is critical. Unfortunately, most Americans do not have one. A Federal Reserve report revealed that only 44% of Americans have enough money in their savings to cover a $400 emergency.
4. Understand and Maximize Employer’s Benefits
As a new, full-time employee, you should understand that your compensation isn’t just limited to your salary. Your total compensation includes your salary, benefits and other incidental benefits. Do your best to fully understand what your compensation package includes and take advantage of the various components.
For example, if your employer sponsors a retirement plan - many employees have access to a 401(k) - start contributing right away. If your employer offers a matching contribution program, set aside enough to meet the full match at a minimum. It’s free money for your future self. Your employer also might offer maternity and paternity leave and paid time off for volunteering. As a new employee, familiarize yourself with these policies and benefits. They might come in handy down the road and could have a big impact on your finances.
5. Pay Yourself First
One of the easiest ways to set yourself up for financial success is to establish automatic transfers. Make the decision once to allocate money toward your emergency fund, savings account or other goal, then set it and forget it. You can schedule the transfer to complete on the days you get paid. You won’t miss the money if you never knew it was there.
Establishing these habits early in your career will help improve your financial wellbeing for the rest of your life. (For more, see: The Most Competitive Industries for New Graduates.)
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This article was originally published on Investopedia.