When you finally graduate and land your first job, the paychecks start rolling in. Compared to before, it’s certainly a lot of money and it’s awfully easy to spend. You earned it right? Many new graduates fall victim to this trap called lifestyle inflation. But it’s important to remember that at any stage of life, it’s wise to live below your means. This is especially true for most indebted dental graduates with functionally negative net worth. So without further ado, here are just a few simple mistakes to avoid after graduation.
NEGLECTING TO MAKE A BUDGET
Start tracking your monthly income and expenses. We personally started with the zero-based budget which is a simple way to track where every dollar goes. Add all of your sources of income and then subtract every single expense/payment until in theory, it equals zero. Hopefully there is money left over which you can commit to saving/investing.
NOT SAVING AT LEAST 20% OF YOUR INCOME
Start saving money now! Many sources suggest setting aside an emergency fund, which can help you get through bumps in the road such as unemployment or unexpected medical costs. This can be three to six months’ worth of household expenses or whatever you feel comfortable with as a family. After saving up an emergency fund, try saving at least 20% of your paycheck right off the top. If 20% seems daunting, start with 5% and slowly increase the percent you save every month. According to a study by the National Institute on Retirement Security, 66% of working millennials (ages 21-32) have nothing saved for retirement!
This seems obvious, but there are many ways to cut down on spending. Consider saving money on rent by living at home with your parents. Try taking public transportation or carpooling with coworkers. Stop buying daily $10 lunches and learn to pack from home. There are plenty of resources on YouTube for cooking and meal planning. Cut your cable. Buy gently used furniture. We have saved A LOT of money by furnishing our home from consignment shops and Facebook marketplace. Even after the dorm, there is still a use for Ikea!
FAILING TO MAKE A PLAN FOR DEBT/TAKING ON NEW DEBT
Do not buy a new car! Check out this great article by Money Life Wax. In general, avoid taking on new debt and do not rely on credit. It’s an important time to make a PLAN to pay off debt. Strategize how to pay off student loans. Do not defer student loans. If the loans are not subsidized, the interest will continue to accumulate and be added to the total principal of the loan. If you are struggling with monthly payments, there are a variety of income-driven repayment plans that can keep the payment low. This repayment estimator helped us compare plans and ultimately led to our decision to refinance. In our case, refinancing greatly reduced our interest rate and will save us a lot of money long-term.
MISSING OUT ON RETIREMENT/401(k)
If your job offers any type of 401(k) or retirement plan, take full advantage. Your contributions are tax-deductible and most employers offer some type of match. Don’t leave free money on the table.
DISREGARDING HEALTH INSURANCE/DISABILITY INSURANCE
Thanks to the Affordable Care Act, many new grads are insured under a parent’s plan until age 26. For older graduates, it’s wise to sign up for health insurance through an employer or purchase an individual plan. Unexpected accidents and diagnoses can result in large hospital bills and ensuing medical debt. For dentists, we also need to consider purchasing disability insurance. You never know when an accident could halt the rest of your career.
NOT EDUCATING YOURSELF ABOUT PERSONAL FINANCE
Although exams and finals are over, there is still plenty to study. Many of us aren’t taught about personal finance, investing, or how to build wealth. Take the time to educate yourself and prepare for the future by reading personal finance websites, blogs, and books. The more planning and investing now, the more time for growth and capital gains.
Currently reading: The Millionaire Next Door
Currently re-reading: The White Coat Investor
THE MISTAKES WE ARE LEARNING FROM
Shortly after dental school, my wife bought a new Subaru. It’s a pretty modest car but it meant taking on more debt. We didn’t move back home, so we didn’t have the option of living with parents, but we still could have saved money on rent. Instead, we chose a brand-new apartment building for two years. We did save money, although it was usually what was leftover at the end of the month. We dragged our feet in regards to tracking our spending and a couple of years went by before we made a plan to pay off student loans. Ultimately, by reading several personal finance books we were inspired to make a change. Now we hope other people can learn from our mistakes and our triumphs as we continue to document our journey.