Broke College Student? Avoid These 5 Money Mistakes

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Life as a new graduate means leaving the college campus for the real world. This world, especially amid high inflation and cost of living expenses, can easily feel really financially overwhelming for grads.

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New grads who aren’t careful might wind up making some money mistakes along the way. Some of these mistakes are ones former college students might know better than to make. Others are rookie mistakes. The good news is no matter what kind of mistake you’re making, there is a way to resolve it and get back on financial track again. Here are some common new grad money mistakes and what you can do instead.

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Falling Behind on Student Loan Debt

Most new graduates exit their campuses with a degree and student debt. The mistake many new graduates make, my anecdotal self included, is not focusing on paying back these loans quickly.

One of the most important things college grads can do is make their loan payments on time every month, said Heather Winston, CFP and assistant vice president at Principal.

Borrowers may be able to refinance or consolidate these loans for a more affordable monthly payment, but it is critical they do not fall behind on paying this debt off. Winston said making these monthly payments a habit not only gets recent grads closer to being debt-free but also enables a positive credit history, which can help them buy a car or house more easily in the future.

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Not Creating a Budget

Budgeting is a common source of money mistakes among new graduates. Some may have a budget but don’t necessarily stick to it each month and overspend on things they don’t need like lunches out or happy hour every day. Others might not have ever had a budget before and don’t know where to begin with setting one up.

For context, a budget is a tool that helps you keep track of the amount of money you have coming in and going out each month. Using a budget allows you to determine exactly where your money is going and the types of expenses your money is going toward, such as fixed expenses like rent which stay the same each month and variable expenses like groceries and utilities which change each month. By tracking your expenses, you’ll be better able to understand your spending habits and budget accordingly.

It’s also important to remember your budget is not meant to be restrictive. (This may be why many recent grads either don’t have one or don’t enjoy using one.) A budget is a tool meant to help you achieve your financial goals. Track your expenses with the help of a designated tracking tool and make adjustments as needed to reach a comfortable balance.

Not Reading Your First Paycheck Carefully

If you haven’t carefully reviewed your first paycheck, now is a good time to do so. In an article with CNBC, Christopher Lyman, a CFP at Cambridge Investment Research, said a mistake many recent graduates make is not understanding their take-home pay.

Take-home pay may already be accounted for in your budget. This is the amount of money you have coming in each month and the source of this income is usually your employer. Take a moment to review what your actual take-home pay is and understand which items, like taxes, are removed from your paycheck. Lyman said understanding how much you’ll actually bring in helps you know how much you’ll be paying in taxes and where to make cuts if you spend more money than you earn.

Thinking You Can’t Invest, Save and Pay Off Debt at the Same Time

Here’s the truth about investing, saving and paying off debt: You don’t have to prioritize doing one over the other. You can actually do them all at the same time.

Winston recommends recent graduates consider dividing the money they earn into each of these buckets — investing, saving and paying off debt — every month after covering their basic expenses.

Not Contributing To an Employer-Sponsored 401(k)

New grads starting their first jobs out of college are recommended by Winston to save in a workplace-sponsored retirement plan, like a 401(k), and take advantage of the employer match.

What if you’re not yet eligible to save in a workplace 401(k)? There are still lots of ways to save money. Winston said to consider tucking away a percentage of your paycheck in a Roth IRA or start funding a high-yield savings account or money market account for emergencies.

While it can be exciting and overwhelming for new grads to be out in the real world and to start spending money from their hard-earned paychecks, Winston said this is the time to start good, responsible financial habits.

“You’ll want to have the funds to both afford any unexpected expenses and support you in post-working years. Even small contributions can grow to a tidy sum over time, so do your best to avoid the traps of short-term thinking,” Winston said. “Your future self will thank you.”

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