Graduation Prep Guide – Finance Edition Pt 1
Congratulations! If you’re reading this you’ve probably recently graduated or will soon graduate from college and begin the early chapters of your professional career.
It’s truly an exciting time to finally reach the culmination of all your hard work over the past few years but as surreal as the experience is, it’s important to recognize that to smoothly transition into the next period of your life, you’re going to want to have a few things lined up. Getting your ducks in a row as they say.
Even if you’re someone like me who’s already graduated from college a while back, feel free to read on. The advice we’re about to lay out can still be valuable for you as well. We can all use a quick refresher now and then right?
Most people will likely focus very heavily on getting themselves off on the right foot professionally but for some reason, there isn’t quite as much of an emphasis placed on getting off to a great financial start. Now whether that’s because public financial knowledge is lacking or it’s just not “cool” to think about finance, we here at Trifigo want to fight against that and make sure that our community is ready and well informed to set themselves up for a bright financial future.
That said, the first piece of advice we’d like to offer is to ‘know what you owe’. Whether you have student loans or credit card debt, it’s important to know the balances from each lender as well as the terms associated with those balances.
Without understanding what dynamics are at play, it will be nearly impossible to prioritize your payments in such a way that you are maximizing not only your cash flow but also your opportunity for improved credit. Someone who’s recently graduated from college is likely to have loans and one thing he or she will want to do is find the various sources of those loans and the interest rates tied to each. The same goes for credit cards if they happen to carry remaining balances.
As a rule of thumb though, if you have both student loans and credit card debt it’s probably a good idea to focus on your credit cards first. Why?
For one, student loans are seen more favorably in the eyes of creditors and can actually be considered to be what some call “good debt” given that, in a sense, it’s an investment in your future. As such having student debt can still help you build up your credit so long as you are making your payments on time. The same however does not apply directly for credit card balances. It’s true that you should definitely hold some kind of balance on your credit cards in order to indicate good credit usage but anything beyond 30% of your combined limit will start to adversely affect your credit score.
Secondly, the average credit card interest rate for 2017 is 15.59% or around 16%. Compare that to the interest rate on loans taken out after July 2013, which are linked to the current 10-year treasury rate. Federal Stafford loans are by law capped at 8.25% for undergrad students and 9.5% for graduate students. Even more, it’s possible that you’ll be able to get a rate even lower than that. So in looking at the interest rates alone, by focusing on paying off your credit cards before your student loans, you’ll quickly see that you’ll end up spending less in interest and as a result increase your disposable income.
Ok, so now you know where your balances lie and what the interest rates are on each. Now what?
One thing you can look into is loan consolidation. There are quite a few options out there so we advise that you do your due diligence in researching the pros and cons of each before moving forward with any of them. There are private institutions you can turn to like SoFi or CommonBond. If you have government loans you can also look into government consolidation options. One in particular you can look into is American Education Services.
If possible, you might want to think about doing the same with your credit cards. SoFi and Lending Club are a few options you can look into for this. The idea here is that you’ll be able to take the various credit card debt that you might have and combine them to a single lender for a lower combined interest rate.
When our platform is launched we will be partnering with some of the industries best companies to provide exclusive benefits to our members. Our process will find the option that best fits your particular situation because in the world of finance hardly ever does one size fit all.
We’ll actually have a post on this later so stay tuned for that but as a quick mention, you should also think through whether you want to be dealing with fixed or variable rates. As you can imagine fixed rates are simply that. Fixed. They are set at the beginning of the loan remain at that rate unless renegotiated. Variable rates however may start at a rate lower than the typical fixed rate but also has the possibility to fluctuate over the life of the loan as dictated by an index. Depending on your risk tolerance, some of you may prefer the latter but just be aware that what you’re paying today could increase dramatically a few years from now. We’d recommend opting for the fixed rate simply because by doing so you are off-loading the risk in variability to the banks rather than taking it on yourself.
From here what you’ll want to do next is to come up with a repayment plan. This is where you think through and outline how much and how often you’ll make payments to get rid of your debt. Think carefully as there are a lot of variables to consider when coming up with this plan.
Those lucky enough to come out of college with a high paying job can probably afford to have a couple hundred dollars coming out of their paycheck every month to make balance payments but others who land jobs that aren’t quite as lucrative will have to be more conscious around how they plan to handle these payments. It wouldn’t make any sense to prioritize your payments if you’re going to get kicked out of your housing for not being able to afford rent.
Speaking of rent, your cost of living will be another one of those important factors you should pay attention to when beginning to plan out your payment strategy. It’s important to have money set aside for food and a roof over your head but these costs will vary depending on where you live. If you’re living in densely populated areas such as San Francisco or New York your dollar probably won’t stretch as far as they might in other parts of the country. Even in areas like San Francisco and New York city, the cost of renting in the heart of the city as opposed to somewhere further away like the suburbs can vary dramatically.
These two factors, your income and living expenses, will directly impact your cash flow but is often times overlooked by many new graduates. This is why we’re trying to shine a spotlight and help bring realization to the fact that they may impact your well-being and lifestyle more than you think.
Well that’s it for part 1 of this series. Stay tuned for part 2 where we’ll help you dig deeper into interest rates and how they should affect your repayment strategy. We’ll also touch on the various types of repayment plans themselves. Go ahead and subscribe so you can make sure you don’t miss out on the next part in this series!