5 Common Financial Mistakes Fresh Graduates Make and How to Avoid Them
Updated: Sep 19
By: Kimberly Tan
Sadly, many university graduates lack financial literacy. They don't have the fundamental competence to succeed in the world of business, let alone manage their money. To make matters worse, some students leave school with significant debt. They can't pay off these loans until they find a job.
The subject of money is barely taught in schools, as traditional education heavily focuses on academic and professional skills, not on financial skills. This explains why students with good credentials may face financial difficulties as they enter the professional world.
For college graduates, financial planning during the first few years of their career is highly crucial since it can determine their future financial habits. Achieving financial freedom is as vital as landing your dream job but securing lucrative pay won't matter in the long term if you can’t manage your earnings.
5 Common Financial Mistakes Fresh Graduates Make and How to Avoid them
If you've recently graduated and are trying your hand at adulting for the first time, avoid committing these common financial mistakes so you can be far ahead of the game.
1. Not investing in financial education
The majority of students attend college for four years, then end their education there. They find work, get paid, balance their checkbooks—it would seem as if that's all there is to it. Then they wonder why they are having financial difficulties. They believe that earning additional money will solve the problem, but they fail to recognize that the issue is their lack of financial education.
How to avoid this: Success is a reflection of a strong financial foundation, which begins with financial intelligence. The fundamental goal of education is to empower your mind to process information into knowledge. This lack of knowledge gives you less financial control, and that can be risky. Your education should be a continuous process. Keep reading books and attending seminars about financial literacy.
2. Poor financial management
Some fresh graduates may be prone to splurging or impulsive shopping upon receiving their first paycheck. This is especially true in today’s highly digital world, where one can simply go online and buy what they need with a tap or click on their device. Lack of spending control might cause shoppers to regret their purchase later on or, worse, accumulate debt.
It can be difficult to slow down if you've become accustomed to a spendthrift lifestyle. Unfortunately, this can lead to unhealthy money habits, such as maxing out your credit card. Since credit cards charge high-interest rates, you might find it difficult to pay off your credit card bills.
How to avoid this: As a rule of thumb, you must not spend more than what you make. This is also where budgeting comes into play. You'll be able to pay off debts faster, worry less about living expenses, and save money if you make a budget and stick to it. You could use online budgeting tools or applications to track your expenditures.
3. Neglecting to pay off student loans
Student loans may have already put you in debt. If you have student loans, it's even more critical to keep a simple lifestyle and avoid overspending to avoid accumulating additional debt. Ignoring student debts, like other types of debt, can harm your credit score in the long run.
Debt is not bad per se, but you must keep it within manageable levels. Otherwise, financial firms might refuse to grant you a loan as there’s a possibility you’ll default on it. In addition, failing to repay your loan may result in you being blacklisted by creditors.
How to avoid this: You must prioritize repaying your student loans before it’s too late. Some student loans offer a grace period, so use it to your advantage. During the grace period, you should begin gradually paying off your student loans to prevent incurring penalties. Treat student loans as a fixed expense that you must include in your monthly budget.
4. Failure to secure life insurance
New graduates rarely consider getting life insurance. You might think it doesn't make financial sense to insure yourself unless you have dependents.
However, you're in for significant advantages by purchasing an insurance policy while you're still young. For one, accidents and medical emergencies can happen to anyone, so you must protect yourself from these scenarios to ensure you’ll continuously earn income to support your day-to-day needs.
How to avoid this: While you need to remain optimistic, remember that life is inherently unpredictable. Even if you are young and appear to be in excellent condition, you must have adequate life and health insurance coverage. The earlier you obtain life insurance, the lower your premiums will be.
Consider purchasing a personalized insurance policy. Select a plan with an adequate coverage that fulfills the medical needs of all policy beneficiaries.
5. Lack of emergency fund
Unpredictable expenditures – whether it's a tire replacement or temporary company shutdowns just like what happened during the pandemic – can wreak havoc on your bank account. If you don't have enough money saved, you might not be able to deal with such unexpected situations.
How to avoid this: Aim for three to six months' worth of living expenses in your emergency fund. You can do this by saving money regularly, no matter how small the amount. You may also look for gigs to earn extra cash.
You Got This!
Growing into an adult can be daunting and demanding, but you can get it right. Set your priorities straight by identifying what your financial goals are. From there, practice self-discipline to help you develop healthy financial habits.