There’s one big financial mistake you don’t want to make after college: Don’t focus so much on your student loan debt that you forget about the rest of your financial health.
It has happened to many recent college graduates. They land a great job. They have a promising career ahead of them. All roads lead to a fantastic future.
And then reality hits. They recognize they are saddled with $50,000 in student loan debt that, all of a sudden, they have to start paying back. They tell themselves they’ll be fine paying off their debt each month because, with their great job, they can even pay off more than the minimum.
However, life hits them with other expenses. There’s a vehicle purchase, some important (and expensive) items that must be bought, and even responses to creative marketing that leads to spur-of-the-moment spending. It all adds up to additional debt, most of which is more expensive (in terms of the interest rate) than college education loans.
After several months of that process, they look at their bank statements only to discover that their initial $50,000 debt is now $90,000. It hits them like a ton of bricks.
The Financial Mistake
If you’re in a similar situation, it’s probably because you didn’t take a look at the big picture. You focused exclusively on one item of debt and channeled all your resources that way — at the expense of sound financial responsibility.
For starters, yes, it’s a great idea to pay off debt. That will keep your credit rating healthy and your good name intact. It will also keep you out of legal troubles, and that’s always a plus.
However, your financial house has more than one room. You’ll need to pay attention to more than just one aspect of your finances if you want to build wealth over time and emerge from debt once and for all.
Step back for a moment and take a good, long look at your finances and ask yourself the following questions:
- Is college debt my only concern?
- What other financial challenges do I face right now?
- What challenges will I face in the future if certain issues aren’t handled?
With the answers to those questions in mind, here are some great tips to mitigate financial mistakes and properly lay out a brighter future:
Understand the difference between “good” and “bad” debt
In the story above, the individual was so obsessed with eliminating college debt that they focused on that single sector and disregarded other important issues.
However, college debt represents an investment in your future. It’s “good” debt because, if you invested wisely, you’ll end up with a great job that has lots of opportunities for growth. On average, college graduates earn $30,000 more than someone with only a high school degree. Bad debt, on the other hand, is money spent on items that depreciate in value over time, such as a car. Even luxury cars have very low resale value with only 1/10 of them being able to sell past the “luxury threshold” of $35,000. So cars can’t be seen as good debt or even a good investment. That’s the debt you should eliminate first.
Develop a game plan to avoid financial mistakes
A big financial mistake is not understanding your current financial situation. It’s important to understand your entire financial picture. And ask yourself, “how do you want to move forward?” Do this by understanding your cash flow and spending habits. Then, develop the appropriate budget. Use your favorite spreadsheet software to amortize your debt based on your scheduled payments. Some of our faves are Personal Capital or Truebill that help you categorize your expenses and alerts you of charges.
Compare your debt interest rate against the interest rate on your savings account
If your savings account is earning more in interest than your debt, then put more money into savings. Chances are you won’t earn more in a savings account so you’ll need to prioritize debt repayment. However, this doesn’t mean you should not pay yourself first. Make sure you have money set aside for emergencies so you don’t rely on credit to cover unforeseen expenses.
You will need that “rainy day” money
Yes, you will need money for an emergency situation. Sudden job losses happen. Big expenses make unwelcome appearances from time to time. Try to build up a stash of at least 6 months’ worth of your current income. Learn more on creating your emergency fund strategy.
Not having multiple streams of income is a financial mistake
Stock market investors are often advised not to put all of their eggs in one basket. Why should you do the same with your income stream? If you have only one job, and you suddenly lose that job, then you’re down to an income of $0. However, if you have multiple income streams and you lose one of them, it’s not so bad.
Keep your spending to a minimum
Lifestyle inflation is another major financial mistake that happens when income increases and so does the cost of one’s life. Keep your expenses in mind. Try to find ways to cut costs and limit expenses. Look for ways to save on your utilities, cable, and satellite bills. Companies that offer those services often employ people who are willing to talk to you about how you can reduce your expenses. Also, shop the clearance racks or use cashback websites when shopping online like Rakuten. And learn how to use rebate apps so you can save big on groceries. You can use apps like iBotta and Fetch Rewards for cashback and rebates.
You’ve worked hard to get to the spot where you’re at right now. Try not to let your debt discourage you. Keep focusing on paying down your loans responsibly, while also paying attention to your larger financial picture. Have private student loan debt? Do the math and see if refinancing your private student loans can help you save money.