Please enjoy this post by Lauren Davidson, recent grad and aspiring entrepreneur (while I’m adjusting to a summer schedule and trying to close on a rental property!).
What You Need to Know About Money If You Just Graduated
As college graduates get ready to transition to life after school, it can be daunting to think of the financial responsibilities that come with post-college life. For many students, things like mortgages and car payments are still a bit of a mystery. If you have recently graduated or are getting close to graduation, it’s high time to familiarize yourself with some of the basics of finance, and this article will serve as a short introduction to several topics.
How do student loan payments work?
Most student loan payments start after the grace period ends post-graduation, or when a student drops below half-time in school. It is very important to make contact with your student loan servicer before you graduate, so that you know exactly when your first payment will be due. Many students get nervous about upcoming loan payments and put off contacting their servicer, but all this accomplishes is confusion and the possibility of a missed first payment.
If you have loans with multiple lenders, you must become especially organized because you may have payments due at different times of the month. If possible, request that your payment dates be moved as close together as possible, so that you are less likely to miss any. Knowing how your student loan payments work is extremely important, especially for recent grads!
How does a mortgage work?
Everyone knows what a mortgage generally is (a home loan), but not everyone knows how to obtain one or the different types that are available. The most common type of mortgage is a conventional loan at a fixed interest rate for a term of 30 years. However, it’s possible to get variable interest rate loans, and to get government loans that can save the borrower a lot of money and even decrease what they have to come up with for a down payment. If the borrower or the borrower’s spouse has served in the military, they may be eligible for a VA home loan which requires no down payment at all.
FHA loans are another type of mortgage loan, and they require only a 3.5% down payment. Sometimes, depending upon the borrower’s income and credit score, states have down payment assistance programs that provide free money or a secondary loan to help cover down payments and closing costs. The closing costs on a mortgage consist of prepaid interest, prepaid taxes and home insurance, one-time fees such as surveys and escrow fees, and other costs associated with the due diligence of purchasing a home. These costs typically run around $4-5,000 but can be more or less depending upon the price of the home.
[Note from Amanda: Our first home loan was FHA – I was still in college and we were just starting out. We had a fixed interest rate (I would not recommend a variable interest rate) and only had to come up with a few thousand down. But, if I were to go back in time, I wouldn’t buy the house. If we continued to rent a few more years, we would have been better off financially. We ended up moving just 3 months after purchasing this first house due to a job change. My advice? Make sure you know you’ll stay in one location and have at least 20% down payment to avoid Private Mortgage Insurance (PMI).]
How does an auto loan work?
Some college students will graduate already having had an auto loan, but the majority of students will finance a car for the first time after graduation. Auto loans are loans specifically for the purchase of a new or used vehicle, and typical terms are from 36-72 months. These are much shorter loans than student loans or mortgages, but the interest rate on an auto loan tends to be higher than a mortgage except for very well-qualified buyers.
Auto loans typically require that the purchaser put down a reasonable down payment on the car and then make monthly payments until the loan is paid off. Most lenders will require that an owner maintain full coverage insurance for a financed car, which can also add to the cost of having an auto loan.
[From Amanda: Instead of financing a car, I recommend you pretend that you have a payment and save that amount in a designated savings account each month until you have enough to pay cash for a good, used car. Financing cars was one of the main things that kept us in debt for years. Once we (finally) stopped the cycle of auto loans we were able to save and work toward an early retirement.]
How do retirement accounts work?
Retirement accounts, commonly called 401(k) accounts because of their IRS designation, are special accounts that offer tax incentives for people who put away money regularly toward their retirement. Depending upon your personal financial situation, you may choose a retirement plan that taxes your money before it is invested or that defers tax until you take the money out during retirement.
Since retired individuals typically have lower incomes than those that work full-time, most people who take advantage of 401(k) accounts choose to invest their money pre-tax and then pay taxes on it once they retire and withdraw funds. The government allows this because it is socially beneficial to encourage people to save for their own retirement. The significant tax savings with these types of accounts means that more people are motivated to save money.
[Me again: Many employers that offer 401k plans offer a company match up to a certain amount you contribute. This is free money. Don’t pass up this free money! It isn’t difficult to start your 401k and you shouldn’t worry too much about making a bad investing choice. The worst choice you can make is not to start.]
How do employee benefits work?
Most employers are required by state and federal law to provide benefits for their employees, particularly health insurance for employees that work over a certain number of hours. The particular benefits that your employer must provide to you depend in part upon the job that you do and in part upon the size of your employer. Some very small employers, typically with less than a dozen employees, are exempted from certain benefit requirements that apply to larger employers. In addition to subsidized health insurance, it is common for employers to offer limited life insurance plans and matching 401(k) programs.
[And once again, I have something to say. 🙂 With the prevalence of high deductible health insurance plans, Health Savings Accounts (HSAs) are frequently offered by employers as well. If you have a high deductible plan, you need to start contributing to an HSA – the money is tax free going in and tax free coming out (as long as it’s used for health care expenses). If you have a health issue, you will need the money. But, if you have no health issues and you can save it, even better – it’s also a perfect way to save, tax free, for retirement.]
A big thanks to Lauren for the great overview!