Graduating from university or college marks a significant milestone for many, as it’s the end of their formal educational years. However, it’s also when things start to get real, as the transition from student life to professional life can present some unique money management challenges.
From budgeting to managing debt, many new grads must learn about financial independence. (Fortunately, you can already count on saving money as an alumni with Sonnet’s
Not making a budget
One of the most common financial mistakes you can make is not having a budget. Without a budget, you won’t have a clear idea of where your money is going each month, which typically leads to overspending.
To create a budget, start by listing your income at the top of a spreadsheet. Then, input all your expenses, such as rent, food, internet, and entertainment. While that may seem straightforward, you also need to account for items such as student loan repayments (if any), long-term savings, and building an emergency fund.
Once you start mapping out and tracking your expenses, you can make meaningful decisions, such as reducing how much you eat out, to achieve your budget goals.
Forgetting to build an emergency fund
Many new grads might not have heard of the term “emergency fund,” but they’ll quickly learn how vital it is. An emergency fund protects you from expensive surprises like car repairs, medical bills, or sudden job loss. Without this safety net, you'll probably rely on credit cards or loans when emergencies happen.
As a general rule, it’s recommended to set aside three to six months' worth of expenses for your emergency fund. Understandably, that might be a lot for someone who has just landed their first job, so start with a smaller goal, such as saving $25 or $50 a month until you reach $1,000.
Keep your emergency fund in a high-interest
Making only the minimum payment on credit cards
New grads often fall into the trap of only paying the minimum amount due on their credit cards. This might seem like a sensible strategy since it provides some cash flow to balance their budget, but it actually worsens the situation because of the high interest charges.
Paying only the minimum can cause your debt to last for years or even decades. For example, a $2,000 balance with 19% interest might take over 30 years to pay off using minimum payments alone.
To avoid interest charges entirely, pay off your full balance each month before the deadline. If you're facing a cap crunch, paying as much as you can instead of just the minimum balance can still save you a lot.
Not taking advantage of employer retirement benefits
Group Registered Retirement Savings Plans and defined contribution pension plans are common workplace benefits that can greatly enhance your long-term savings, but both new grads and new employees often overlook them.
Generally, the plan works like this: For each dollar you put into your retirement plan, your employer will match it up to a certain percentage. For example, you might be allowed to contribute up to 10% of your pre-tax salary to the group RRSP, and the company will match 50% of that. So, if you contribute the full 10%, your employer would add 5%.
It's essentially free money and a smart way to grow your retirement fund. Not all employers offer group retirement benefits, so if you have access, be sure to take advantage of them.
Letting lifestyle creep consume you
Lifestyle creep occurs when your spending rises as your income increases. For some recent grads, it can get out of hand, especially when they transition from earning zero a month to a full-time salary.
While it’s understandable to want your own place, buy nicer clothes, or even get a car, these expenses can quickly add up and stretch your budget. Before you know it, you're spending your entire paycheque each month with little to show for it.
To avoid lifestyle creep, set a budget as early as possible. Focus on saving and decide how much you want to set aside, then stick to that amount. It’s okay to have fun and spend, but do so within reason. If you prevent lifestyle creep from taking hold, your savings will grow alongside your income.
Final thoughts
Money mistakes happen, so don’t get too upset if they affect you. Instead, take the opportunity to learn, as the sooner you take control of your money, the more likely you’ll find financial independence as a new graduate.
Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog
Money We Have is one of Canada’s most trusted sources when it comes to money and travel. As a completely self-taught, do-it-yourself investor with no formal training, he makes money easy to understand for all Canadians. His specialties include personal finance, budget travel, millennial money, credit cards, and trending destinations.