Grad Guide to Saving & Spending
Do you really need a budget? How can you start building credit? Is it possible to make a million bucks without lifting a finger? We answer your questions on everything you wish you had learned in school -- but didn't -- about money management.
Q. Do I really need a budget?
A. Yes. But "budget" doesn't have to be a bad word. When you're just starting out, you face a ton of new expenses -- rent, student loans, utilities, car, etc. --- so you want to make sure you have enough money to go around. Start by tracking all your expenses each month, including whatever you pay for with cash. Then, look for areas where you can use your money more wisely. For example, you may find you're spending too much on eating out, so you decide to brown-bag your lunch twice a week and use the money you save to pay down your credit cards. See Budget for Your Peace of Mind for more information, and use our Budgeting Worksheet to help you track your expenses.
Q. How much money should I spend each month on food, rent, etc.?
A. Below is a guideline to help you budget your money to make sure your expenses are covered. You may have to make some adjustments for your situation. If you spend less on housing, for example, you can put the extra money from that category toward paying down debt. And remember, these percentages apply to your take-home pay -- not your gross income before taxes. For more info, see Cost-Of-Living Reality Check.
30% Housing10% Utilities and other housing expenditures (including renters insurance)15% Food (at-home and away)10% Transportation (including car loan)10% Debt repayment (student loans and credit cards)10% Saving5% Clothing5% Entertainment5% Car insurance and miscellaneous personal expenses
Q. How do I go about paying back my student loans?
A. All good things must come to an end, and that includes the "free" money you received to pay for school. Luckily, you get a six-month grace period after graduation before you must start paying back your federal loans. So May graduates won't see their first bill until November. Then, you generally can choose whether you want to make fixed payments over ten to 30 years, make payments that gradually increase over time, or make variable payments based on your income. See How to Repay Student Loans for a game plan that works for you.
Q. How can I save money on my student loans?
A. Of course, the quicker you pay them off the more money you save on interest. You might also benefit from consolidating your loans with a lender that offers a few perks. For example, some lenders may trim 0.25% off your rate if you pay your bill electronically. They may knock 1% or more off your rate if you consistently make on-time payments for a certain period of time. Use our tool to compare deals.
Q. I applied for a credit card but got turned down because I don't have any credit. How can I build a credit report from scratch?
A. It's a modern twist on the classic chicken-or-the-egg conundrum: You can't get credit until you have a history of repaying credit. A great way to get around this barrier is to get a secured credit card. These cards allow you to make a deposit with a bank or credit union and that amount usually becomes your credit limit. You build a history just as fast as you would with a regular credit card, and after making on-time payments for a year, you should have an adequate credit history to switch to an unsecured card and get your deposit back. See Build Credit Without a Credit Card for more tips.
Q. Is my credit score really that important?
A. Yes. Not only does your credit score influence the interest rates you pay and your ability to obtain more credit -- say, when you want to buy a car or get a mortgage -- but also it plays a big role in other areas of your life. For example, some employers use credit reports to screen new hires. And insurers may use your score to set homeowners and auto insurance rates. Learn more about credit scores and how to improve your magic number.
Q. What's the best type of credit card for me?
A. Do you intend to carry a balance most months? If so, finding a card with a low interest rate is your top priority. But if you plan to pay off your balance each month -- which we highly recommend -- you want a card that doesn't charge an annual fee. Your interest rate won't matter because you won't be charged if you don't carry a balance. See Credit Cards You'll Love for 11 cards that are appealing.
Q. I'm graduating with a mound of credit card debt. Help?
A. You're not alone. A college graduate starts out in the world with more than $3,000 of credit card debt, on average, (not to mention some hefty student loan debt). Your first step to getting back in the black: Put your credit cards away so you're not tempted to charge even more. (Stashing them in our sock drawer or freezer or even handing them over to a trusted friend for safekeeping should work well.) Then, look for ways to cut your spending and use the cash to pay off your debt sooner. You might also consider a balance transfer to get a lower interest rate. And finally, get professional help from a nonprofit credit counselor if you need it. Learn more about how to tame your credit card debt.
Q. As long as I make the minimum payment on my credit cards, I'm okay, right?
A. Wrong! That'll be enough to keep the credit police off your back, but it doesn't go far enough. Consider this: If you have $3,000 on a credit card charging 18% interest, and you made a required 4% minimum payment each month, it would take you about three years to pay it off and cost you an extra $800 in interest. You should aim to pay off your high interest debt as soon as possible -- even before investing your money elsewhere. Use our calculator to find out what it'll take to pay off your balance. Then check out our strategies to help you climb out of debt faster.
Q. Slow down! I'm terrible with numbers. Can you explain how "interest" works in language I can understand?
A. You bet. Whenever you use someone else's money, you have to pay for it. So, when you take out a loan or use a credit card, you are using the bank's money, and it charges you a fee for that privilege. So for every $100 on a credit card that charges 18% interest, you'll owe the lender $18 to say "thanks for spotting me the cash." This rule goes the other way, too: Whenever someone else uses your money, they should pay for it. When you open a savings account, you are giving the bank the privilege of using your money. So you should look for an account that will pay you a decent rate on your deposit. So, for example, for every $100 in your money market account, which pays 2% interest, you'll collect $2 from the bank. And you don't have to do a thing!
Q. Should I save/invest or pay off debt?
A. Both are worthy goals. But there's a simple rule-of-thumb to follow here: Evaluate which option will give you the biggest return on your money. (Use this calculator to help crunch the numbers.) For example, if you pay off a credit card charging 18% interest, that's like making an 18% return on your money. That's hard to beat -- the stock market has historically returned 10% annually. Your choice gets trickier, though, with low-rate loans. If you have a loan charging a 5% interest rate, you probably can make more money saving or investing extra cash elsewhere. In that case, it makes financial sense to make your set monthly payment, but it wouldn't be worth it to pay extra -- unless you really crave the freedom that comes from knowing you're debt-free. If that's the case, go for it.
Q. I finally have some cash to put in savings. Where exactly should I keep it?
A. Your first stop is your emergency fund. You should aim to have enough money on-hand to cover three- to six-months' worth of living expenses in case something unexpected were to happen. Start out by saving $1,000 in a high yielding money-market savings account, such as Emigrant Direct or ING Direct. These two reputable institutions are FDIC-insured, pay you a nice interest rate on your money and they're free to join. Once you've got your initial $1,000, you should keep socking away some money each month to build your stash higher. But you also can start investing part of your extra money each month into other investments and retirement accounts, such as a Roth IRA or a 401(k). Learn more about what to look for when shopping for a place to stash your cash.
Q. My salary is pathetic. How can I build an emergency savings fund when I make squat?
A. We know, the idea of saving up to three- to six-months' worth of living expenses may seem impossible. Focus, instead on saving just $1,000 to start -- that's $83 a month for one year -- and steadily working your way up from there. Still seems steep? Did you get a tax refund or job signing bonus? That's a start. Plus, take a look at your spending and identify areas to cut back. For example, you could forgo your daily latte in favor of a home brew or cancel your premium cable subscription and go back to basic cable. Those little expenses can easily add up to $83. (See Save Money on Practically Everything for more ideas.) The key is to start saving something, no matter how little. Learn more about how to build your financial foundation.
Q. How can I make a million bucks without having to work for it?
A. Marry rich. Win the lottery. Or, start investing your money on a regular basis. If a 25-year-old invested $200 a month and earned an average 10% annually on the money, she'd have $1 million saved by the time she turned 63. Calculate what it'll take for you to hit a million bucks.
You may be able top $1 million even sooner by taking advantage of your employer's 401(k) plan. Some employers will match your contributions to a 401(k) account -- that's free money, baby. So, in our above example, let's say the woman's employer gave her a 50-cent match for every dollar she invested. She'd reach the million-dollar mark by age 59. If she increased her contribution to $300 a month and netted a match on top of that, she'd be worth a million by the time she turned 55 -- and she hardly had to lift a finger to pull it off. Learn more about the power of a 401(k) in The Quarter-Life Retirement Plan. Of course, there are other ways to make a million if you're willing to take some risks and work hard. See Yes, You Can Make a Million for inspiration.