Financial Tips to Prepare College Students for the Real World

College Student Managing Finances

At First Mid, we care about the financial success of all our customers — from students of all ages to those new to the workforce, from those with spouses and families to those who are nearing retirement. We are here to help customers in all walks and stages of life.

For this blog article, we are focusing on college students and recent college graduates who are just starting out in their careers. We sent a list of questions from current college students to Trever Kuipers, Financial Advisor with First Mid Wealth Management at our Bloomington banking center. His answers to their questions are eye-opening and could help college students, or anyone, land on their feet when entering the workforce.

How much income should I be making once I graduate?
This will vary greatly, depending on your degree and experience in your field. Most college graduates should earn more than minimum wage, but as the minimum wage rate continues to rise, employers are struggling to keep up in the salary game. Focus more on joining a company that shares your values and offers room for advancement. Also, good benefits, like health insurance and 401(k) matching, are big perks that you should take into consideration.

What are the pros and cons of working for a salary versus working for an hourly rate?
When you work for a salary, you know exactly how much every paycheck will be, making it easier to budget. However, if there is a large project or event with your company, you may work more hours than normal to get things done. When you work hourly, you will get paid for all the hours you devote to your job. This means on heavy weeks, you may get overtime, and on lighter weeks, you may only get paid for the minimum number of hours agreed upon. This can make it more difficult to budget and plan if you are getting paid a different amount every week.

Is it okay to move out of my parents’ house with college debt?
That really depends on your family dynamic. If your parents are comfortable with you continuing to live with them while you knock down some debt, go for it! However, it’s not always a practical situation. It’s okay to have your own place, as long as you know you can afford rent/payments on your home, condo, townhouse, or apartment, while also being dedicated to paying down your loans. Make sure you are living within your means and have a plan to get those loans paid off as soon as possible. That can mean having side jobs along with your full-time job until you pay off your loans.

What is the best way to organize and budget for a financially independent lifestyle? Should I start tracking my spending habits? How do I begin?
The first step is to look at your bank statement! This simple tool is automatically generated every month and shows you what money came in and where it went. Start adding up all the money spent at coffee shops, restaurants, streaming services, etc. You may be surprised at how much you are spending. Once you figure out how much you really need to live comfortably, set up an automatic transfer of a dollar amount you can afford into a savings account each month. Treat savings like a bill and commit yourself to building a rainy-day fund as soon as possible. Here are some tips to help jump-start your emergency fund.

What is a mortgage loan and what is its average length?
A mortgage is simply a loan taken out to purchase a home. They are typically 15 – 30 years in length and can have the option of adding in your property taxes and homeowners’ insurance for one monthly payment. 

What are average mortgage payments each month and what is an affordable loan amount?
This varies greatly with location and a person’s income. On average, a reasonable mortgage payment will be 25 – 35% of your monthly net income.

How long after graduating from college do you recommend for someone to buy a home? Or, how long after graduating can most people afford to buy a home?
Everyone’s situation is different, and there is no magic number to answer this question. Buying a home is a HUGE decision and should not be taken lightly. Once you close on the property, anything that may need repaired or replaced down the road becomes YOUR responsibility. Therefore, it is important to have a solid rainy-day fund to be prepared for the financial responsibilities that come with homeownership. Also, be sure to consider how long you are planning to stay in a specific geographic area. Although some people profit from selling a home, the housing market could decrease significantly when you are ready to sell, meaning you may be forced to sell the home for less than you paid for it.  

When should I start saving for a future mortgage?
Some mortgages can require as much as a 20% down payment. If owning a home is one of your goals, you should start saving as soon as possible so you are prepared when the opportunity arises. First Mid’s mortgage lenders recommend these four tips to help you get started. You can also learn about First Mid’s low down payment mortgage options here.

How does a 401(k) and retirement apply to me now?
Regardless of your age, if a company offers a retirement savings plan, DO IT. The earlier you start planning for retirement, the earlier you can potentially retire, and the more options you have in retirement. Most company plans offer a match, so for every dollar you put toward your retirement, they will match up to a certain percent (usually around 3 – 6%). By saving your own money for retirement, your employer is essentially giving you a bonus toward your retirement, even if you are only able to save a little bit. Once you start a 401(k), be committed to increasing the amount you put toward it on an annual basis, or every time you receive a raise. These small increases will result in big savings down the road.

What are some tips for saving now, even though I don’t make a large amount of money?
Treat saving like any other monthly bill. Be committed to putting money away and transfer a dollar amount you can afford, even if it’s only $10 or $20, to your savings account every month BEFORE you start paying your other bills. Better yet, set up an automatic transfer into your savings account from your paycheck deposit. If you never see that money in your checking account, you are less likely to spend it. Then, when you are debating between cooking at home or going to a restaurant, you are less tempted to spend the extra money on an expensive dinner out. Using Online Banking is an easy way to set up an automatic transfer from one account to another on a regular schedule.

What are some things you wish you knew before you started managing your finances on your own?
Just because someone says you can afford something, doesn’t mean it’s true… auto dealerships, home improvement stores, and furniture shops are always offering credit options with one goal in mind — to make a sale for them. They often don’t have your best interest in mind. Zero percent down, no payments for 12 months, etc. can often be financial traps that catch up to you down the road. If you aren’t committed to getting those items paid off in a specific time frame, you can easily find yourself with payments that you may not be able to afford.

What is compound interest and where will I see it? Is it good or bad?
Compound interest is interest MADE off the money you have already EARNED. If you invest $100 and earn 5%, you now have $105. If you don’t withdraw any money, and it stays invested at the same rate, you now have $105 earning 5%, growing that amount to $105.25. The extra 25 cents is the interest made off the extra $5 that you had previously earned. This may not seem like much, but over time, with larger amounts of money, compound interest can really add up! The easiest place to see compound interest at work is in a savings account or CD, and it’s a great way to build savings faster. On the opposite side, it can negatively affect your debt as well. If you owe money on a credit card and don’t make the payment, they will apply late charges and interest charges. Those charges are added to your total debt and next month’s interest is charged on the now higher amount. It can quickly snowball into owing much more than originally spent.

What is the 72 rule? What is the 10/20 rule? What is the 50/30/20 rule?
The 72 rule is a very simple formula used to estimate the number of years it will take money to double when invested. Simply take 72 and divide it by the interest rate your money is earning. If you have $100 earning 1%, it will take 72 years to reach $200 (72/1=72). The higher the interest rate, the faster the money will grow. So, that same $100 earning 10% would be worth $200 in 7.2 years (72/10= 7.2). 

The 10/20 rule applies to debt. It states that your total debt, excluding mortgage, should not exceed 20% of your annual net income. Also, your monthly payment towards debt should not exceed 10% of your net paycheck. 

The 50/30/20 rule applies to budgeting. When doing a budget, 50% of your paycheck should go toward your basic needs (housing/groceries/utilities/health care). 30% of your paycheck should go toward “wants” (entertainment/hobbies/shopping/charitable donations). The final 20% should go toward saving and long-term financial goals.

How do I start investing?
With technology today, it has never been easier to start investing, but it’s important to have a well-established savings first. You need to have at least six months of income in a savings account that you can access in the event of losing a job, medical emergency, etc.  These funds need to be in cash, or a similar investment type that cannot lose value.

Once you have a comfortable nest egg in place, you can start to explore the world of investing in things that have more potential for risk, but also much larger potential for gains. There is an entire universe of online platforms and apps that can help you start buying individual stocks or funds. These options are great for beginners who want to start experiencing the investment world. As you start to become more financially independent, you should consult with a financial professional to see if having an expert help you navigate your investment journey is appropriate. Often, a financial advisor can help guide you on investment selection and help take the emotion out of investing. They can help you set goals and put a financial plan into place. 

If you have additional questions about which financial decisions make the most sense for you, you can talk with any First Mid financial advisor. To find the advisor nearest you, click here.

You can also visit any of our banking centers to open a savings account so you can start budgeting and saving for future needs. To find the First Mid banking center nearest you, click here.