Today's college graduates are vulnerable when it comes to their financial stability after leaving the safety net of college and entering the "real world." The financial decisions made in the years that immediately follow graduation tend to be some of the most crucial in a young adult's life, ones that require careful consideration and can have life-long implications.
Let's take a step back and look at the realities facing these young adults. Student debt in the U.S. crossed the $1.2 trillion mark last year. Seventy-one percent of all students graduating from a four year college have student debt, and the average debt level is nearly $30,000, according to The Project on Student Debt.
In a recent TD Bank Financial Education survey, we learned that nearly 70 percent of Millennials (ages 18-34) have never received formal financial education. Moreover, 76 percent of Millennials reported that they are seeking financial advice, from basic information about checking and savings accounts to more complicated topics, such as mortgages and starting a small business.
Recent graduates are beginning to plan for the next major phase of their lives. They might be making large investments -- such as renting an apartment and buying a vehicle -- or smaller ones -- such as purchasing housewares and getting a professional wardrobe. Whether they are ready or not, they are starting to face the financial responsibilities of entering the workforce, and it is important they keep these three things in mind as they do.
1. Create a Plan to Pay Down Debt
One of the most important considerations for a recent graduate, particularly if they leave college with debt, is to work toward lowering their current debt without piling on more. This may be one of the easiest concepts to grasp, but the hardest on which to follow through. This is where budgeting becomes critical. There are a few purchases they may need to finance, like a car or furniture. But, for the most part, it is important to live a modest lifestyle after college to start reducing debt versus taking on more.
2. Get Into a Relationship.. With Your Bank
Early financial relationships can be an asset for young adults. As is the case with many college students, their current bank account was created by their parent(s) or another family member.
However, when entering the workforce, recent graduates should look to establish their own relationships with their current bank or with new financial institutions. This will not only help them establish their own banking footprint, it will also ensure that their specific banking needs are being met at this point in their lives -- such as having a bank that has longer hours, a large network of ATMs, person to person payments, or mobile deposit.
Another reason for starting a relationship with a bank is to help establish long-term financial goals. Whether these recent graduates will be looking to gain access to capital to start a small business or plan to purchase their first home, having a relationship with a bank from the get-go will put them at an advantage to be able to obtain the financial services they'll need.
3. Understand There Will Be Miscellaneous Expenses
In life, there will always be miscellaneous expenses that cannot be accounted for by even the most budget-savvy adults. For recent graduates, some of these expenses include insurance, unexpected medical bills, repairs and last-minute travel, among many other things. Young adults should look to maintain an emergency fund, which they can build slowly every month for these expenses. This will help accommodate for any unforeseen expenses and prevent more debt from accumulating.
For larger purchases down the road, financing will be required and a buyer's debt-to-income ratio will come into play. Across the country, debt-to-income ratios are posing a challenge to young adults with sizable monthly school loan payments. When it comes to buying a home or a car, even prospective buyers who make above average entry-level salaries are still being denied financing based on their existing debt. Establishing good credit by making loan repayment a priority will put prospective buyers on more solid financial ground when it comes to managing debt and securing financing in the future. Planning for larger purchases and anticipating the additional savings needed, such as closing costs for a home or ongoing maintenance for a car, is critical to ensuring you will be comfortable with the additional expenses that home and car ownership require.
These are just a few considerations for recent graduates. Above all, they should continue to educate themselves -- through online research, community programs, financial institutions -- on personal finance and financial planning. It is vital for recent graduates to take it upon themselves to learn and keep up-to-date on the latest issues that can affect their financial well-being. Knowledge is power, and what you don't know can hurt you, financially.
Nandita Bakhshi is the Head of Retail Distribution and Product for TD Bank. In this role, she leads product innovation and delivery through retail channels, including direct channels and online and mobile banking.