According to U.S. Census figures, more than 19.7 million students enrolled in college in 2012, with hundreds of thousands of students anticipating their degrees near the end of the year. These young adults are largely confined in the relatively safe, secure and structured environment that is academia, but new life lessons are learned, as students transition into the real world. How graduates approach financial planning in the first few years after college can set the tone for their financial habits down the road. By adhering to a strategy and plan, recent college graduates can avoid mistakes in how they deal with their personal finances.

Real World Lesson #1: Plan to Save
Recent graduates celebrate their recent conquest of college term papers, exams and theses. Undoubtedly, a large chunk of these newly minted grads take whatever jobs they can find. Some are disciplined enough to pursue the right field for them. However, recent grads too often find the traditional workplace routine unfulfilling or unchallenging. Unreasonable spending habits often take over as an escape from the daily grind, and entire paychecks are spent on regular expenses (such as rent and utilities), purchases (such as an automobile and furniture) and luxury items (such as travel and an oversized television).

SEE: Budget Without Blowing Off Your Friends

Although you should enjoy your newfound freedom, you should also strive to save a nice portion of your paychecks. The recurring cash flow can be placed in a combination of stock, bond and money market investments. Once you are no longer living in the comfort of your parents' home, it is prudent to plan for contingencies, such as automobile accidents, personal injury, lay-offs and other unforeseen expenses.

Real World Lesson #2: Money Spent Is Money Lost
Having been broke for four years or so while in college, recent graduates naturally equate a steady paycheck with newfound wealth. No longer subject to the disagreeable taste of dorm food and late-night snacking on hot noodles, young adults easily form a new habit of transforming their recurring income into regular dining at upscale restaurants, bars and clubs.

In the real world, assets either appreciate or depreciate. The purchase of a car is the purchase of a depreciating asset because the car diminishes in value as soon as it leaves the lot. The same is true for furniture, clothing and expansive television screens. Flying to Cabo San Lucas over spring break is an expense - it is cash leaving your wallet, never to return. The same is true of costly apartments, fine dining and weekend barhopping.

Several factors can help create real financial security:

  • The performance of assets that appreciate over time, such as blue-chip stocks, dividend-yielding bonds and homes.

  • Investing in yourself as a professional to improve your prospects for growth and increased income. By investing money each month to improve your performance in your chosen field, you can expect to earn more promotions and higher pay over the long run than your complacent counterparts. These personal investments can take the form of training, online classes, industry certifications, books and seminars.

In a dynamic and competitive marketplace, paychecks provide only the illusion of security; it's how you use your paychecks that determines your financial well-being.

SEE: Payroll Deductions Pay Off

Real World Lesson #3: Control Debt Before It Controls You
Depreciating assets and reckless spending often lead to only one thing: debt. Debt devours your cash flow and negates your assets, skewing your personal net worth toward the negative side. Set time lines for eliminating your various debts, including school, car, credit card and home loans. Pay off the debts with the highest interest rates first - that's just common sense.

There is good debt; you can use other people's money to buy appreciating assets, essentially using other people's money to make money for yourself. That's how the private equity people do it. But the rule of thumb is to discipline yourself in executing your plan of attack. Kill the debt beast, whatever its form, by a certain deadline.

If a paycheck only provides the illusion of security, then debt should provide real fear of the negative things that can happen to a recent graduate if unforeseen contingencies occur.

SEE: How To Invest When You're Deep In Debt

Real World Lesson #4: Become a Good Credit Risk
Paychecks are vulnerable to being reduced or cut off altogether. In Lesson No. 3, we point out that if poor habits and consumption behaviors are not kept in check, debt can be financially disastrous. However, large transactions do exist that necessitate the use of debt - the wheels of the economy would grind to a halt if consumers had to bring in sacks of cash in order to pay the full value of a car or home up front. That's where credit comes in.

Manageable debt, as a means of establishing a good credit history and acquiring appreciating assets, helps recent grads become financially credible to lenders when it is time to take out an auto loan or mortgage. Additionally, extenuating circumstances may require a recent graduate to take out an emergency loan. Manageable debt means that payments and the principal balance are easily affordable and that there is a target time line for eventual pay-off. It is not an excuse to throw money at the craps table in Vegas. That's an even nastier rabbit hole.

SEE: 5 Steps To Scoring A Mortgage

Real World Lesson #5: Face Facts - Get Life Insurance
Death is stressful and expensive for survivors. Lack of foresight and planning can lead to financial distress for your family members. Life insurance can help alleviate much of this stress at a critical time.

SEE: What To Expect When Applying For Life Insurance

The Bottom Line
Personal finance is a critical area for your mental and emotional well-being. As a student, IQ, grades, standardized test scores, popularity ratings and tolerance for alcohol are the benchmarks against which your teachers and peers judged your success. Once you graduate, personal finance should become one of your dominant priorities.

Unfortunately, the educational system - while providing interesting theories and insights on the universe - provides little in the way of real-world preparation for students in the areas of personal finance, workplace challenges or life's other adversities. A strong personal balance sheet and income statement will go a long way in helping you to overcome these challenges and maybe even find new and exciting opportunities to increase your net worth.

Related Articles
  1. Professionals

    Is A Stockbroker Career For You?

    Becoming a stockbroker requires a broad skill set and the willingness to put in long hours. But the rewards can be enormous.
  2. Investing

    7 Creative Ways to Save for an Early Retirement

    Take note of these out of the box steps you can take towards securing yourself an earlier, more comfortable retirement.
  3. Products and Investments

    Cash Value vs Term Life Insurance: Which is Best?

    The debate between cash value life insurance and term insurance plus an investment plan is an ongoing one. Here's a look at both sides of the argument.
  4. Retirement

    Birch Box Review: Is It Worth It?

    Learn more about the convenience of the subscription beauty box industry, and discover why the Birchbox company in particular has become so popular.
  5. Insurance

    Getting Your (Insurance) House in Order

    From starting a family to retirement, insurance can play a role in taking care of financial needs. This piece looks at some of the choices you can make.
  6. Investing Basics

    How to Become A Self-Taught Financial Expert

    Becoming a self-taught financial expert may not be as daunting of a task as it seems.
  7. Term

    Is Term Life Insurance the Right Choice?

    Term life insurance is a policy with a limited coverage period.
  8. Personal Wealth & Private Banking

    Women, Invest In Your Financial Literacy

    Becoming financially literate should be on the to-do list of anyone who is not.
  9. Savings

    How to Save Your First $100,000

    Saving your first $100,000 requires the discipline to put money away and control your spending. But just remember – the savings get bigger as you go.
  10. Insurance

    Cashing In Your Life Insurance

    In tough economic times, tapping into a life insurance policy can provide a needed source of funds.
RELATED FAQS
  1. What’s the difference between the two federal student loan programs (FFEL and Direct)?

    The short answer is that one loan program still exists (Federal Direct Loans) and one was ended by the Health Care and Education ... Read Full Answer >>
  2. Do beneficiaries pay taxes on life insurance?

    Generally speaking, when the beneficiary of a life insurance policy receives the death benefit, this money is not counted ... Read Full Answer >>
  3. Can I borrow from my annuity to put a down payment on a house?

    You can borrow from your annuity to put a down payment on a house, but be prepared to pay an assortment of fees and penalties. ... Read Full Answer >>
  4. What are the biggest disadvantages of annuities?

    Annuities can sound enticing when pitched by a salesperson who, not coincidentally, makes huge commissions selling them. ... Read Full Answer >>
  5. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  6. How can I determine if a longevity annuity is right for me?

    A longevity annuity may be right for an individual if, based on his current health and a family history of longevity, he ... Read Full Answer >>
Hot Definitions
  1. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  2. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  3. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  4. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  5. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
Trading Center