The Graduating Student’s Guide to Managing Finances and Tackling Debt

This is a cross-post from our recent guest post on lifehacker.

If you are like most graduating college students, you probably have a few thousand dollars in credit card debt and even more in student loans. In fact, total outstanding student loan debt in the US has surpassed total outstanding credit card debt for the first time ever, and is projected to hit $1 trillion by 2012. In this post, I will explore simple ways graduating students or recent graduates can take more control of their finances and pay down debts faster by doing a reality check, automating, and keeping expenses down while saving.

Do a Quick Reality Check

The Graduating Student’s Guide to Managing Finances and Tackling Debt
Leaving the shelter of college and going out on your own is a big change. Whether you’re moving across the country, or boomeranging back into your parents house, it can be scary to become responsible for your own finances. However, ignoring them can lead to serious problems down the road. Take a few minutes now to make a basic spreadsheet that lists all your assets and liabilities (this example took me only five minutes to put together). Don’t worry – it’s natural for graduates to be in the red. The good news is that a solid plan will put you back on track over time (which you have plenty of). In addition, this spreadsheet lists all of your fixed monthly obligations including rent and minimum monthly debt payments.

This spreadsheet will tell you the absolute minimum amount that you need to pay every month and give you a sense of what your net worth, which is a great way to position your early salary discussions and negotiate better compensation. If your loan payments will increase later, input the higher amounts in the spreadsheet. If you can’t meet this monthly payment and won’t be able to do so in the foreseeable future, you need to do whatever you can to lower these fixed expenses (such as sell your car or find a cheaper place to live). If you have trouble making monthly payments on existing debt, such as a credit card or student loan, contact the loan provider and ask for their assistance in making alternative arrangements. The last thing you want to do is get behind on your payments and negatively impact your credit. Remember, good credit is the key to larger purchases and home ownership.

After figuring out where you stand, you probably realized that you have quite a bit to work through. If you haven’t chosen a bank for your primary checking account yet, be sure to compare ATM and recurring fees (such as minimum balance fees), online bill-pay options and ATM/bank locations near you. Your new employer might be a good resource to ask about this. Ramit Sethi talks about automating your finances and I recommend a similar setup designed specifically for recent graduates and young professionals with debt.

If you have debt, its helpful to commit to a monthly payment and aggressively pay it down immediately in an automatic way to prevent overspending. This simplified ING Direct setup helps control spending and pay down debt quickly.

This automation setup isn’t rocket science—it’s just a simple way to prevent yourself from spending and achieve to your personal goals. I have a similar setup and it has worked well for me.

The Graduating Student’s Guide to Managing Finances and Tackling DebtSTEP 01
Open an electronic/online checking account that allows bill payments with ING Direct or Ally Bank or a similar online bank service. Link it to the primary checking account, where you get your direct deposits or cash your checks. Alternatively, you can setup direct deposits to go straight into this account. This account will hold the money for all your fixed expenses from your spreadsheet above.

STEP 02
Set up monthly automatic transfers to this new account based on your baseline expense number. It works well if you transfer the money after pay days so that the money is immediately out of your hands and ready to pay down debts.

The Graduating Student’s Guide to Managing Finances and Tackling Debt

STEP 03
Set up automatic bill payment from that account to pay off credit cards, student loans and other fixed expenses like rent. Make sure these payments are scheduled at least 3 days after your automatic transfer and at least a few days before your payment due date.

The Graduating Student’s Guide to Managing Finances and Tackling Debt

If you are paying off credit cards, you will need to stop spending on them for this to work! You might find this simple calculator useful in figuring out your initial credit card pay off plan.

Now you’ve got an almost foolproof automated system that you can adjust anytime depending on your situation. Ideally, it’s a hands-off automation that lasts until your debt is paid.

Keep Expenses Down and Start Saving

When you first start making income, it can be tempting to increase your living standard to match your salary. You should allow yourself some luxuries, but keep in mind it’s much harder to reduce expenses later than to increase them, so take things slow. One important goal for your first year out of school is to establish a reserve fund of three months rent and living expenses. Put that in a savings account and leave it for emergencies. Once you’ve done that, your focus should be to aggressively pay down debt. High interest debt (meaning debts with rates higher than 10%) is extremely toxic to your financial health and you should seek to eliminate that as soon as possible by paying much more than minimum payments, always to the highest interest rate debt first. For many students, saving is the last thing on their mind. Now that you are on your own, its important to have cash available for the inevitable moment when you come up short, decide to travel, or start thinking about that first down payment on a house. You can also setup automatic savings plans similar to what we outlined above using ING Direct’s high-yield savings accounts.

Graduating is an important first step to building a stable financial future for yourself. Get started now, and you’ll thank yourself later.

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