by Lisa Young Stiers
(Epsilon Omicron, Indiana State University)
Graduating from DePauw University last spring, Caitlin Cavanaugh thought she was prepared for life in the “real world.” After all, she had been successfully managing her own spending money for years. But the financial world still held a few surprises — particularly the cost of establishing an apartment.
“You don’t think about how much a new ice cream scoop is going to cost or how much toilet bowl cleaner is going to cost,” Cavanaugh remembers. “Budget liberally because everything’s going to cost more than you think it will.”
Financial surprises await most college graduates. According to a recent study by Sallie Mae, 84 percent of undergraduates said they needed more education on financial management topics.
Now a year later, Cavanaugh, an initiate of Alpha chapter, has a year of graduate school under her belt and a firm grasp on fiscal responsibility — even giving up her favorite steaks to live within her budget.
“Know what you can and can’t do, and stay within your boundaries,” recommends Cavanaugh, who plans visits to her parents when she craves red meat. “The more aware you are of how you spend your money, the better shape you’ll be in.”
Still, it can be a stressful adjustment to living on your own limited income.
“You get to the end of the month and have just a little money left, but you still have to pay bills,” says Cavanaugh, a grad student in Industrial and Organizational Psychology at Indiana University-Purdue University Indianapolis. “It can be difficult.”
To help new Alpha Chi Omega alumnae make a smooth financial transition, we gathered tips from some financial savvy Alpha Chis. Here is their advice.
Don’t Go Crazy
Job equals paycheck equals new things, right? Not so fast!
“Don’t be anxious to get a new car or great apartment,” urges Nancy Cooper Pitt, JD, a certified financial planner and representative of Miller Cunning & Pitt, part of Financial Partners Group. “You’ll have time to grow in to those. It’s important not only to plan for your immediate needs but also have a plan for your future.”
An essential first step is building an emergency fund — money that is readily and easily available. Do everything you can to keep expenses low for the first few months so that you can sock the extra away, says DeLynn Moring Zell, a certified financial planner and Managing Principal at Bridgeworth Financial in Birmingham. This might even mean moving back in with parents, staying in your college apartment with roommates, or living in someone’s basement.
When she graduated from Birmingham-Southern College, Zell moved into the basement of Virginia Bailey, her Alpha Omega chapter advisor. The two exchanged free board for evening babysitting— a barter that benefited them both.
“It was huge for me,” Zell remembers. “I was able to save my first few paychecks. When I moved out, I had money in the bank and was able to pay the first and last deposits on an apartment and get utilities turned on. I had an emergency fund in place, and I was able to move on to the next step.”
Cavanaugh recommends finding a roommate, who can split the cost of utilities, household supplies and furniture.
Don’t go crazy with job expectations, either, Pitt says. Be flexible and realize your first position may not be ideal. View it as continuing education in the workplace.
“This may not be the job you stay with the rest of your life,” she says. “But it is important to use your skills and do something you enjoy.”
Once you find a job, Pitt recommends investing in an appropriate work wardrobe.
“Even if purchased at a thrift store, this can be a wonderful investment,” she explains.
Build a Budget
Despite what many believe, “budget” is not a punishment. Experts urge new graduates to create a budget as a tool, a guide to get you where you want to go.
“Some people look at a budget as a bad word,” says Pitt, an initiate of Alpha Chi chapter at Butler University. “I look at it as a way to structure your income and build a pathway to your future.”
In addition to the necessities — food, clothing, shelter — include savings as a budget line item.
“Pay yourself first,” Zell recommends. “What you accumulate in life is not based on what you make but on what you spend. Living below your means is the key. If you can’t put away 10 to 15 percent of your paycheck every month, then your expenses are out of whack.”
Another budget essential is insurance— from health to automobile to renters insurance. At the urging of her father, Cavanaugh invested in a renters insurance policy.
“I wouldn’t have known about renters insurance if my parents hadn’t told me,” she admits. “If anything should happen, it covers your belongings.”
Once a budget is in place, it’s crucial to stay on top of your spending. Cavanaugh tracks her banking online, so that she can be alerted to any discrepancies quickly. She uses Quicken to keep spending details organized and categorized — and make preparing taxes at the end of the year easier.
Dig out of Debt
In 2009, the average college senior graduated with $4,100 in credit card debt, up from $2,900 five years earlier, reports the Sallie Mae study. Nearly all had charged direct education expenses, including textbooks, supplies and even tuition, to their cards.
If you have credit card debt, take careful inventory of each debt — amount, interest rate, terms — to determine the best strategy to eliminate them.
Zell recommends ordering debts from highest to lowest interest rate. Make at least minimum payments on all outstanding loans, but put all extra money toward the card or debt charging the highest interest rate. Once that is eliminated, take the amount of the monthly payment and roll it into paying off the loan with the next highest interest rate. Resist the urge to add new debt — such as mortgage payments — until your clear out past debts.
“People have been sucked into thinking they should forget about these other things so they can get the down payment for a house,” Zell says. “I think they should get debt paid off and then worry about a house.”
Revisit Student Loans
If you have student loans, talk to an expert about your options, which might include changing your payment plan, consolidation or deferment.
Don’t assume your current repayment plan is your only option. Depending on your situation, federal student loan repayment options might include extended repayment; graduated repayment (lower payments at the beginning with increasing amounts due later); and income-sensitive or income-based plans.
“You have to know your options for payback,” Cavanaugh says, “and you have to have all the right paperwork filed with the right people.”
Create Good Credit
A credit score — sometimes referred to as a FICO score — is the grade of your credit behavior. Credit scores range from 300 to 850 — the higher, the better.
A good score can mean lower interest rates and more choices on potential loans. A bad score can lead not only to loan rejection but also difficulty renting an apartment or setting up utilities.
“You should treat it as one of your most valuable possessions,” Pitt says. “It will stay with you the rest of your life.”
Ways to improve your credit score include:
- Paying bills on time
- Making more than the minimum payment on credit cards
- Keeping credit card balances to less than 50 percent of the available credit limit on the card
- Having a long credit history — canceling an old credit card may hurt your score because it may shorten the length of your credit history
Avoid actions that might lower your credit score, such as:
- Exceeding your limit on credit cards
- Opening and closing too many credit accounts in a short period of time
- Making late payments
- Defaulting on a loan
- Writing bad checks
- Declaring bankruptcy
Be cautious about any potential loan, including credit cards that offer rewards or low interest rates. In exchange for these perks, you might find an annual fee or other unfriendly terms. “You have to know the benefits as well as the pitfalls,” Pitt warns. “Do some searching and find the one that’s right for you.”
Fund Your Future
Even though you’ve just started in the workforce, now is the perfect time to begin saving for retirement. Time is on your side. Consider this example from the U.S. Department of Labor publication Saving Fitness: A Guide to Your Money and Your Financial Future. “Let’s say that you put $1,000 at the beginning of each year into an IRA from age 20 through age 30 (11 years) and then never put in another dime. The account earns 7 percent annually. When you retire at age 65 you’ll have $168,514 in the account. Your friend doesn’t start until age 30, but saves the same amount annually for 35 years straight. Despite putting in three times as much money, your friend’s account grows to only $147,913.”
The earlier you start saving, the more your money can work for you, thanks to the power of compounding. For every 10 years you delay before starting to save for retirement, you will need to save three times as much each month to catch up.
Even a small investment can make a big different. And, it doesn’t have to be complicated. Start by investigating your employee retirement options, and enroll as soon as you’re eligible. Strive to invest as much money as will be matched by your employer.
“That’s free money,” Pitt says. “Take advantage of that.”
Keep Learning
Educate yourself about your financial options. The internet, books, TV and seminars are great ways to become familiar with terminology and basic financial knowledge. When you’re ready, find a financial planner you can trust to help build your financial future, Pitt says. One place to start is the national Financial Planning Association, which lists professional members who adhere to a code of ethics, says Pitt, immediate past president of the Financial Planning Association’s Indiana organization. Learn more at http://www.fpaforfinancialplanning.org/.
Find Financial Freedom
Sure, a new car or designer dress may make you feel great right away, but being fiscally responsible can bring much greater contentment.
“People need to find what brings them joy,” Pitt says. “Worrying about money is one of the quickest ways to dampen joy. Don’t let money overwhelm you. You can find richness in friends and family as well as dollars and cents. Let dollars and cents help you get there. Don’t let it be the goal.”