It’s summer when millions of young people will be graduating from college and, in the eyes of older adults, they will be joining the “real world,” whatever that is. Just for the record, I still haven’t found the real world and have no idea what that term is supposed to mean. Graduates are entering a time in their lives of great opportunity and some peril. Make the right moves and you can be ready for retirement as early as your mid-50s. Make the wrong moves and you’ll be working until you’re 70 or beyond. You’re not avoiding mistakes for the other adults in your life or for the family that may or may not be in your future, you’re making the right moves for Future You. No other reason makes sense.
Like with many aspects of personal finance, the mistakes young people make are surprisingly consistent. Just avoiding the big things can put you way ahead of the pack and shave years off your retirement date.
Paying Too Much Rent
This is a tough one, I get it. After spending years in cramped dorm rooms, slogging through tough classes and finally landing that first job that pays well, the temptation is there to splurge a little on an upscale apartment. There’s a tendency to look at your top level salary and underestimate your actual take home pay after deductions and a 401(k) contribution. Combine those and you get a formula for rent that drags down your budget at a time you should be laying the groundwork for a lifetime of saving. Go with the smallest apartment you can afford that’s close enough to work to ride bike or take public transportation.
Buying Or Leasing a New Car
The reason you want to live close to work is so you can put off buying or leasing a car as long as possible. Any new expense you take on is a top level cost deducted from your net income. So, yeah, you may think $4,200 a month sounds like a lot of money, but by the time you take out taxes, a 401(k) contribution and health insurance, you’ll be surprised how little you have left. Believe me that I know how tempting $138 a month for a new Toyota must look after years of schlepping a ride from friends and driving beaters, but hold off on buying that new car for a year or two and you’ll be in much better shape financially.
Underestimating Student Loan Payments
Those student loan bills will be starting almost as soon as you return your cap and gown. Like rent and car payments, student loan payments are another top line expense that comes out of your adjusted gross income. Taking on too many obligations all at once will make you a prisoner of that new job, living paycheck to paycheck. Unlike rent or a car payment, however, if you’re unemployed you can get a temporary deferment from your student loans. The average student loan debt is around $29,000. Payments on a ten year note will run about $300 a month.
Do The Math
For those taking on too much right away, let’s do some simple math. That $150 a month for a car payment, $50 a month for car insurance, $300 a month for student loans and $1,200 a month for rent (not including utilities!) and you’re already up to $1,700 a month that’s committed before you spend a dime on food, clothing and entertainment. Depending upon where you live, your monthly take home pay from $50,000 a year, after taxes and a 401(k) plan contribution, will be around $2,754. That leaves $1054, or $263 a week, for gas, utilities, food, health care coverage, entertainment, phone and, oh yeah, savings!
With that perspective the car and rent take on greater significance. Anything you can shave off that $1,400 a month committed to a car payment, auto insurance and rent can make a huge impact on your finances. Holding off taking on big expenses is, literally, money in the bank.