Years ago when I was starting my first job out of school, I got the worst piece of money advice from my boss.
“Charge something big on your credit card to motivate you to make your sales quota.”
It was great for my boss because it meant that I made her more money, but worthless to me because it meant that instead of making money I was just breaking even because my income would go right to paying off my credit card.
I didn’t take her advice. But I remember a girl who took it and ran with it.
Her first week on the job, she bought a $4000 purse. That’s 20% of a decent down payment on a home and she spent it on a PURSE!
She sat in the cubicle next to me and I can remember how desperate she sounded talking to potential clients. Desperate to land a big client in the hopes of paying off her useless debt. Clients don’t respond to desperation and the less they responded to her, the more she pestered them.
She never did make her sales quota and was let go within two months. The only thing she gained from that job was stress of having to pay back her debt.
This is an example on a small scale, but a problem I see with new college graduates. They get their first job and go from make $8 an hour at a part-time job to $40,000 a year and go crazy! They rent expensive apartments, buy new cars and max out their credit cards.
With the ‘last in, first out’ lay-off approach and our economy the way it is, new grads are usually the first to go and they’re left with consumer debt they piled on assuming they’d have this job for a few years.
Some are smart enough to sell some of their new purchases (at a loss) to pay off their debt, but most are now used to living beyond their means and…
The life of debt is born.
I made these mistakes myself. The more money I made, the more I spent attempting to keep up a lifestyle rather than plan for the future and ended up with a $34,00 debt and very little to show for it .
If I could go back, here’s what I would do to save more money as a new grad:
1. Live at home for another year or two
We all want our freedom when we get our first jobs, but the ones who are most free are the ones who continue to live at home at almost no cost for a few more years and save their money so that when they are ready to move out, they’re not strangled by debt.
2. Start an emergency fund
Lay offs, accidents and all kinds of unexpected things happen all the time. I didn’t start an emergency fund until I was 30 and I regret this. Even if I had saved $100 a month when I was 25, it would have turned into $6000 by 30.
3. Start paying student loans ASAP
I have friends who are paying their student loans into their late 30′s because they’ve been making tiny payments or deferred them as long as they can. By this age, they have mortgages, insurance and kids to pay for. Why include a student loan as well?
Some suggest not paying your student loan and investing instead. I disagree. You don’t know what will happen with your investments. You could easily lose most of that money.
4. Don’t use more than one credit card
This is the time that most people acquire credit card debt. Using 3 or 4 credit cards and paying the minimum on each is a sure way to create a nightmare. Instead, stick to one card and pay it off every month.
5. Save, save, save
This is the easiest time to save money, especially if you’re living at home. Saving money now doesn’t only create excellent money habits, but it prepares you for a much better life in the future. If you’re living at home and making a decent income, there’s no reason not to save half of your monthly income.
These days, it seems like it’s getting worse and students are piling on debt even before graduation. In 2005, 69% of first year students had no debt, today that number is less than 15%.
Based on my own experience and what I see new grads do, I know we’re not adequately prepared upon graduation. We’re taught how to find jobs and identify careers we’d like to pursue, but not how to manage money and as a result, most of us start out with pesky debt.