Pomp and circumstance. Caps and gowns. Weekend celebrations full of laughs, maybe a few tears, and plenty of cake. Yes, graduation season is officially upon us.
Whether your graduate is leaving high school and planning for college, or your grad is finally earning that college degree and preparing for post-grad life, you undoubtedly want to acknowledge their hard work with a meaningful gift. What could be more meaningful than setting them on the path of financial wellness?
In the time-honored tradition of the sage commencement speech, I offer these words of advice to pass on to your graduate in the hopes of fostering healthy financial choices. Although this advice doesn’t offer the immediate gratification of a card full of cash, trust that these well-timed words can offer a greater ROI than any material item left on the gift table.
High School Grads
Academics and Finances Go Hand-in-hand
We send high school kids off to college without explaining that what happens in class has a major impact on college expenses. For instance, how much extra debt is incurred when students decide to drop a class two weeks into the semester? Or when a college sophomore decides to switch majors and has to essentially start over? What about those who don’t take a full course load and end up staying in school for five, six, or even more years?
Talk to your high school student about doing the research now to ensure they understand the rules. What are the drop policies? What’s required of their major (including starting salary and where they may have to move to find a job in that field), and what’s required in order to graduate on time?
College Affordability
If your high school grad has her/his heart set on a pricey college, but the costs have you concerned, there are a few options to consider:
- Take general education and prerequisite courses at a cheaper school, like a community college, before transferring to that pricey school. Bonus savings if your student chooses local and can save on room and board by staying at home. *Just be sure to work with both schools to ensure that credits will transfer.*
- Research your occupational choice before deciding on your school. With a quick peek at the Bureau of Labor website, you can get a feel for the amount of time it will take to pay off your student loans. Don’t spend $200k on college for a $25k/yr career!
- More expensive schools often have larger endowments to provide scholarships and other aid. Don’t be scared away by the price tag; explore all the options and you may be pleasantly surprised by what you can afford.
Scholarship options are not just for incoming freshmen. There are many scholarships available for students beyond the first year, including those just for upper-level students or those in select majors. Keep looking and applying with free sites like Fastweb.
Just Because You Can Doesn’t Mean You Should
If your high school grad will be borrowing federal loans, make sure they understand a few rules of thumb:
- It’s not free money. It must be paid back. Monitor your borrowing as you progress through school so you avoid the sticker shock of eventual repayment.
- You may receive more federal aid than you actually need in the form of a “refund check.” It’s not a refund. It’s loan money that must be paid back. Just because you can use the money however you want doesn’t mean you necessarily should. You’ll just be robbing your future self by increasing your loan amounts. Return the money or adjust the number of loans you accept upfront.
- If you have unsubsidized federal loans, that means interest is building on those loans from day one. When you eventually start repaying those loans, all that interest will be tacked on to your total loan amount. You will then get charged interest on that new amount. It’s called capitalization.
You can lessen the sting of capitalization by paying the monthly interest on these loans while in school or during your grace period.
College Grads
Prepare Now for Loan Repayment
Repaying student loans may start immediately for those with private loans, or it may start in six months for those with federal loans. You may have just one lender to pay, or you may have several. For federal loans, you may have up to eight repayment plans to choose from. Clearly, there are a lot of options and choices to make now to ensure you get and stay on track. Here’s how to get started:
- Get a listing of all your federal loans via the National Student Loan Data System. Pull a free credit report to view any private loans in your name.
- Update your contact information with all loan servicers to ensure you don’t miss any critical communication. This is very important as you move or change phone numbers after graduation.
Complete federal loan Exit Counseling as a great way to understand your federal loan repayment options and sign up for the plan that is right for you.
Start Saving Early
It may seem hard to save when you’re starting your career, but it can make a world of difference in being able to weather financial setbacks or plan for a comfortable retirement. Consider this: When you start saving outweighs how much you save! A 25-year-old who invests $5,000 a year for just ten years will earn more than a 35-year-old who invests the same amount every year for 30 years. Compound interest favors the young.
Saving can be made easier with a few tips:
- Budget. No, it’s not always fun. But the clarity helps you align your money and your values. If saving is important to you, a budget will be your guide to make it happen.
- Create an emergency fund for the unplanned stuff that will happen. Cars break down, people get sick, jobs fall through. If you have an emergency fund, you can lessen the blow from these costly events so you’re not financially crippled.
- Participate in your employer’s 401(k); if they offer a match, max that out. If you don’t, you’re just leaving money on the table. Your employer could pay your future tax bill for you! Also, if you leave that job, don’t cash out! Rollover your 401(k) into a new plan instead.
- Don’t use credit cards for loans. Carrying a credit card balance is one of the most expensive ways to borrow money and should be avoided at all costs. This is the place where most money problems start. Anytime you use a loan to buy assets, you reduce your future purchasing power. Your money can’t work for you in this situation. There are costs to using future money (interest, fees, opportunity cost). Simple rule- If you can’t pay it off at the end of the month, then that is the clue that you are probably spending outside of your means.
Avoid Lifestyle Creep
As your career advances and you find yourself earning more, it can be tempting to upgrade. You may want better clothes, a fancier car, a larger apartment or home, and expensive vacations. This is lifestyle creep and while it may initially feel like freedom to do what you want, it can actually keep you held hostage in maintaining a lifestyle you can’t afford.
Here’s what you do to avoid lifestyle inflation:
- Plan for fun spending and keep an account just for that. Work it into your budget so you’re making regular contributions to your fun account. It’s important to enjoy both planned purchases and spontaneous splurges.
- Keep your eye on the bigger prize by prioritizing your goals. If you know you need to invest $XX a month to retire at 55, or need to save $XX for your child’s college fund, you’ll be less tempted to spend on unnecessary wants when your goals are clear and defined.
- Evaluate your inner circle for those who support or sabotage your financial plans. If Friend A likes a high-priced night on the town, while Friend B would be happy with a potluck and game night, you may want to surround yourself with more folks like Friend B. FOMO isn’t only a mental strain, it gets expensive too!
For the Class of 2019, and to you, their friends and family, I wish you all the best of luck in your future endeavors. May the gift of financial health be one that we continue to share and pass down, for that is the gift that keeps on giving.