Thursday, January 18, 2007

The 5 biggest financial mistakes new graduates make

Graduation is an exciting time and you’ll probably experience more changes during the 6 months following graduation than at any other single time in your life. For many people it’ll be the first time you’ve had a full-time job making good money (you hope), the first time you’ve lived on your own, the first time you’ve lived in a different state (or country) and the first time you’ve been in complete control over what you’re going to do with your life. It’s a stressful time but also exhilarating.

Unfortunately, with the first blush of freedom, both personal and financial, many grads jump into situations without fully thinking them out. Below are 5 of the worst mistakes new grads make and hints on how you can avoid them.

1. Ooh, pretty, sparkly

It’s understandable, you’re finally receiving real pay checks, you have a shiny new job and it just makes sense to have a shiny new car to match. Unfortunately, financially speaking buying a new car is one of the worst decisions you can make. Most new cars depreciate 25% or more within the first year which means that you’ll be stuck paying full price for something that went on sale 10 minutes after you purchased it.

Instead of buying a new car it’s a much better idea save your money for a few months and pay cash for a used car. A 3-5 year old car can look just as nice as a new one and can cost half the price. If you really think that buying a new car is the way to go, do yourself a favor and try it out first. For 12 months, put the amount of your car payment into a savings account each month. Don’t forget to include the extra money that you’ll pay for the higher insurance coverage which you’ll need with a financed car.

If, after a year, you are able to easily save for retirement, pay your bills in full and on time and still make your ‘car payment’ then go for it. Use the money you’ve saved over the last year as a down payment on the car that you want. However, what you’ll probably discover is that the $400/month car payment that seemed so easy to make isn’t quite so easy now that you’re paying on student loans, credit cards, utilities, entertainment and all of the other expenses you may never have had. It’s usually about 6 months into the new car loan (when those student loans start coming due) that most new grads begin seriously regretting their purchase.

2. The super sized apartment with a side of furniture
3. The employee’s new clothes
4. Retirement? I’m only 23! I’ve got plenty of time!
5. Credit, credit, who’s got good credit?