Life after graduating college is a time of surprises. You’re thrust into the adult world for the first time, forced to earn your way and find your place, all while still feeling like a kid inside. Some people make the transition smoothly, but most of us struggle a bit.
That’s especially true when it comes to your finances. Given the poor state of financial education in American schools, most people graduate college barely able to write a check or remember the PIN number for their debit card.
So, a little stumbling is inevitable – but that doesn’t mean you need to fall on your face. The best way to avoid a rude awakening is to get ahead of the game. Here are some of the biggest budget surprises to look out for.
Lots of students spend their college years without a car, opting to walk, bike or take the bus to class (or to the bars). When they graduate, it can be a shock to leave the comforts of a campus where everything is close by.
While some opt for the sensible choice of buying a used car in cash, many more head for the dealership to purchase or lease a new car. That may have been a practical decision when their parents graduated, but these days the cost of a new car is prohibitive for most twentysomethings. In 2017 the average monthly payment for a new car was $479, not including the cost of insurance, gas and maintenance.
How to avoid them: Buying a car you can’t afford is a common problem graduates run into. It’s so easy to let a smooth-talking salesman convince you to take the plunge, especially when your friends and family are making similar mistakes. But before you sign those papers, look at your budget and consider how much you can truly handle.
Don’t be afraid to shop for a used car. If you look for a newer model, most people won’t even be able to tell the difference. There will always be time to upgrade your ride, but it’s probably not a good idea to start your adult life with a purchase that puts you $30,000 in the hole.
If you still need a car loan, apply for one at a local credit union. They’ll almost certainly have better rates than the dealership, allowing you to put aside more for travel, hobbies and retirement saving.
Since the passage of the Affordable Care Act in 2010, college graduates have been able to stay on their parent’s health insurance until age 26. But if your mom or dad is ready to kick you off the family plan, you’ll have to buy your own coverage.
The average health insurance premium in 2016 was $393, but costs vary widely depending on where you live and what kind of plan your employer offers. The premium isn’t the only thing a recent grad has to worry about – they also have to pay for any out-of-pocket expenses like deductibles, copays and prescriptions.
How to avoid them: If you have a job, see what’s available through your employer. If you’re still considering offers, review the benefits packages closely. The difference in healthcare options could mean saving or spending thousands more each year.
Most health insurance options have a few tiers of service, ranging from bare minimum to first-class insurance. Unless you have a chronic health condition or visit the doctor frequently, opt for the plan with the cheapest premium. You’ll pay a hefty sum when you visit the doctor, but save on monthly premiums.
I’ll never forget it. I was running late to work one day, when I got in my car and noticed a big crack that covered the length of my windshield. I decided to replace it immediately, as it was almost winter and I was worried the windshield could shatter while I was driving. I found a company that came out to my office and replaced the windshield for $100, a small fortune for my 22 year-old self.
I was so disappointed. Here I was, just a few weeks into my first real post-grad job, faced with an $100 emergency I wasn’t prepared for. That experience taught me a valuable lesson about always having a rainy day fund. If I was willing to plan ahead for vacations and concert tickets, I could plan ahead for stray rocks hitting my windshield.
How to avoid them: Unfortunately, there’s nothing you can do to completely avoid emergencies. Eventually, you’ll have a funeral to travel to, a car accident or a medical emergency.
The only way to avoid being financially surprised is to plan ahead with an emergency fund. A starter emergency fund should have at least $1,000 in it, which will cover most minor incidents. If you have an unstable job or a lot of debt, you should save three month’s worth of expenses.
Only use the emergency fund for unforeseen expenses – not for costs you can anticipate. Once you start dipping into your emergency fund for non-emergencies, there’s a good chance it won’t be there when you need it.
A 2014 study from the Brookings Institute found that most freshman college students had a poor idea of how much they owed in student loans. About 50% of them underestimated how much they owed by more than $5,000, and 28% claimed to have no student loans when they still owed money. That might explain why many graduates are shocked when they finally get the Sallie Mae bill in the mail.
How to avoid them: All federal student loan servicers and some private lenders provide a six-month grace period after graduation, meant to help borrowers get settled before they start making payments. If you’re still in that sweet spot, use this time to build up a small emergency fund and prepare your budget for student loans.
Explore your repayment options if you’re worried about affording the monthly bill. Borrowers with federal loans have access to several income-based plans which can significantly decrease how much they pay each month. A graphic designer earning $40,000 a year with $35,000 in student loans could pay as little as $183 a month if they choose a different repayment plan.
Graduates with private loans usually don’t have extra repayment options. Instead, they can try to refinance their loans with another lender to get a lower interest rate.