Financial Guide to Becoming a Grown-Up

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Mark Kantrowitz

By Mark Kantrowitz

December 16, 2019

While college is a transition from a sheltered existence to the real world, most colleges do not teach their students how to become a grown-up. Although “adulting” can include learning how to change a diaper or change your car’s oil, or how to cook (how does one hard-boil an egg, anyway?), this guide focuses on the financial aspects of adulthood.

Each section of this guide provides a brief overview of a key aspect of your financial life after college, with practical advice on managing your money and links to further information.

Do This First

Before you do anything else, start building an emergency fund. The purpose of an emergency fund is to cover unanticipated expenses, such as emergency medical bills, or to cover you expenses during a period of unemployment. Your emergency fund should ideally have at least half a year’s salary.

If your employer matches your contributions to your retirement plan, contribute enough money to maximize the employer match. After all, the employer match is free money.

Automate your bills, especially if there’s a discount or other incentive. Most utilities and other monthly bills will offer an autopay option, where the payment will be automatically transferred from your bank account. When you put your bills on autopay (sometimes called auto-debit), you will be much less likely to be late with a payment. In some cases, like automating student loan payments, you’ll even get an interest rate reduction as an incentive.

Build a Descriptive Budget

There are two main types of budgets, descriptive and prescriptive. A descriptive budget tracks your income and spending. A prescriptive budget sets limits on spending in specific categories.

To build a descriptive budget, keep track of all your spending. Get receipts for every purchase. If a receipt is not available, such as purchases from a vending machine, record the date, description and amount in a notebook.

Every night, add this information to a spreadsheet or a program like or Quicken

Assign each expense to one of several broad categories, such as:

  • Food
  • Dining (eating out)
  • Entertainment
  • Clothing
  • Housing
  • Utilities
  • Furniture
  • Child care
  • Education
  • Transportation
  • Health care (medical, dental, pharmacy, vision)
  • Gym
  • Gifts
  • Vacations
  • Hobbies
  • Pet care
  • Personal care (haircuts, cosmetics, shampoo, toiletries)
  • Communications (TV, telephone, internet)
  • Charitable contributions
  • Taxes
  • Savings

It may also be helpful to label each expense as either mandatory (a need) or discretionary (a want). But, be honest about whether the expense is really necessary. Cable TV and cell phones are wants, not needs. You won’t die or go to jail if you don’t have a cell phone. If you need a cell phone for emergencies, you don’t have to have cell phone service to dial 911 on a cell phone. If you need a cell phone for work, your employer should pay for it.

At the end of each month, total the spending in each category. Increasing awareness of spending is the first step in exercising restraint.

It can be helpful to compare your spending with the average household budget based on the annual Consumer Expenditure Survey.

Set Goals

Once you have a descriptive budget, you can set some financial goals. Goals should be SMART: specific, measurable, attainable, relevant and time-based. The more precise the goals, the better.

For example, you should aim to spend no more than a third (33%) of your budget on housing and at least a fifth (20%) of your budget on savings.

Live below your means, so you have the means to live.

Bank Accounts

Most people pick a bank based on convenience, such as distance of a bank branch from home or work.

But, you should also consider the cost. Ideally, you should choose a bank where there are no monthly fees for your checking and savings accounts, and where the ATMs are also fee-free. You may have to maintain a minimum balance to waive fees. Some banks will waive the fees if you automatically have your paycheck deposited in the checking account.

Generally, interest rates on checking and savings accounts will be very low. Look for a high-yield savings account or other investments to earn money on your savings.

Choose a Credit Card Carefully

Always pay your credit card bills in full each month. Otherwise, you are living beyond your means, spending money that you do not have. If you carry a balance on your credit cards, you will be paying a lot of interest. If you pay the bill within the grace period, which must be at least 21 days, you won’t be charged any interest on new purchases.

If you don’t carry a balance on your credit cards, look for credit cards that do not charge an annual fee. Some rewards credit cards will even give you cash back based on your purchases.

Check Your Credit History Annually

Your credit scores and credit history can affect whether you are approved for a loan and the interest rate you are charged on the loan.

If you pay every bill on time, by the due date, you will build a good credit history.

Creditors, such as credit card issuers, report your on-time and late payments to the three national credit bureaus, Experian, TransUnion and Equifax.

You can review your credit history at each of these credit bureaus once a year, for free, at Promptly correct any errors on your credit report.

Be a Smart Shopper

Shop around when buying an expensive item, comparing the prices from several stores and on different models. Comparison shopping can save you a lot of money.

Before buying an expensive item, wait a few days. This will help you avoid impulse purchases.

Eat before grocery shopping. If you are hungry, you will buy more food.

Look for coupons online and in your Sunday newspaper to save money.

When buying appliances, ask the store for a discount. Most store managers have the discretion to give a 10% discount. All you have to do is ask for it. They may also provide free delivery and installation, as well as pickup and disposal of old appliances.

How to Save Money

To save money, your expenses need to be less than your income. It becomes easier to save if you “pay yourself first” by automatically transferring money from your checking account to a savings account or investment account. You will quickly get used to having less money to spend in your checking account, especially if you use autopay to automatically make the monthly payments.

You can increase the money available for savings by cutting your spending, increasing your income and selling stuff you don’t need, especially if you haven’t used it in over a year.

Save for Retirement

You should save a fifth of your income for the last fifth of your life. You should also contribute enough to your retirement plan to maximize your employer’s matching contribution.

Some employers offer a 401(k) or 403(b) retirement plan. Others offer a pension plan. (There are a variety of other retirement plans with acronyms like SEP, SIMPLE, Keogh, 457(b), etc.) If your employer doesn’t offer a retirement plan, you should consider contributing to an IRA. You can contribute up to $6,000 a year ($7,000 if you’re age 50 or older). You may be able to deduct contributions to your IRA on your federal income tax return.

After you change employers, consider rolling over your 401(k) or 403(b) to a Rollover IRA.


You can invest additional savings in the stock market.

Although stock market investments tend to have a higher rate of return than bank accounts, they also carry more risk of loss. Investing in stocks is riskier than investing in bonds, so one measure of risk is the asset allocation of the investment, which is the percentage that is invested in stocks and other equities.

Start off by investing in a mutual fund, such as a Total Stock Market fund or a S&P 500 fund. These mutual funds invest in a collection of stocks that mimic the performance of the stock market as a whole. This gives you the benefit of diversifying your investments, so that losses in a single stock will not cause a lot of volatility in your brokerage account.

If you invest regularly, saving the same amount each month, you will get the benefit of dollar-cost averaging. When stock prices are low, you will buy more shares. When stock prices are high, you will buy fewer shares. This is a variation on the advice to buy low and sell high.

When you sell stocks or other investments, you will realize capital gains or losses, depending on whether the stock price is higher or lower than what it was when you bought the stocks. Capital gains are reported as income on your federal income tax return. It is best to offset them by harvesting capital losses from stocks that have gone down in value. If your capital losses exceed your capital gains by up to $3,000, the difference will be subtracted from your income, reducing your adjusted gross income (AGI).

Choose your broker and investments carefully. Some stock brokers charge higher fees than others. Some mutual funds charge higher fees than other mutual funds. These may be referred to as a “load” (a commission upon purchase or sale of the fund) or as an expense ratio (an annual fee for managing the fund). You may be able to minimize fees by investing in exchange-traded funds (ETF) instead of mutual funds.


Student Loans

Sign up for auto-debit (autopay) on your student loans. This will help ensure that your payments are always on time. Plus, many lenders will reduce your interest rate by 0.25% or 0.50% if you agree to make the payments through auto-debit.

If you have extra money, you should consider paying off your student loan quicker. Generally, you should apply the extra payments to the loan with the highest interest rate. This can save you a lot of interest over the life of the loan. The only exception is when you have a credit card or other debt with an even higher interest rate.

Otherwise, look into refinancing your student loans (especially private student loans) a few years after graduation, when your credit scores have improved. Then, you might be able to qualify for a better interest rate. Keep in mind refinancing federal student loans means a loss in many benefits – income-driven repayment plans, any federal forgiveness programs, generous deferment options, and more.

Claim the student loan interest deduction on your federal income tax return. It can save you a few hundred dollars a year on your federal income taxes.

Buying a Car

While there is a temptation to buy a luxury vehicle, they are also much more expensive. Your primary goal is to buy a car that can get you from one place to another, such as from home to work and back.

Besides buying a cheaper make and model of automobile, you should also consider buying a car that is a few years old. It will be much cheaper than a brand-new vehicle. If you decide to buy a new car, many auto dealers offer special discounts to recent college graduates in addition to the standard discounts.

An auto loan is used to buy a car. It is sometimes called “financing” a car. An auto lease lets you use the car for a period of time, but you do not own the car.

Although the monthly payments on a lease may be lower than the monthly payments on a loan, an auto lease may ultimately cost you more, since the auto loan payments end. However, some people prefer an auto lease because they can get a new car every few years. Yet, there may be a mileage limit on an auto lease, and you will be responsible for any dings and damage to the vehicle.

You will need to get auto insurance for your car, which will cover costs that occur if your car is in an accident or is stolen. Many insurance providers offer discounts to alumni from specific colleges. There are three main components of an auto insurance policy: liability, collision and comprehensive.

  • Liability covers the cost of medical care and property damage for others.
  • Collision covers the cost of repair or replacement of your car.
  • Comprehensive covers the cost of repair or replacement if your car is stolen or damaged other than in a collision.

You can reduce the cost of your auto insurance premiums by choosing a higher deductible. The deductible is the amount you pay before your insurer covers the rest.

Renting an Apartment

When you rent an apartment, you will be required to provide a security deposit, sometimes called first and last month’s rent. The security deposit should be returned to you after the end of your lease, if you return the apartment in the same good condition as when you first started renting it.

Be sure to get a copy of the written rental agreement, as this will describe your rights and responsibilities.

Before you sign a rental agreement, be sure you understand what is and is not covered by your rent payments. Some apartments may include all utilities (water, gas, electric, sewage) and even cable TV, while others may not. Some apartments may come furnished; otherwise, you’ll have to buy your own furniture. If the lease does not cover utilities, you may have to pay a deposit to the utility company.

It is a good idea to get renter’s insurance. Renter’s insurance covers your belongings against theft and damage. It may also cover your liability if a guest is injured while in your apartment. Renter’s insurance does not cover damage to the apartment you’re renting.

Buying a Home

Buying a home is often more expensive than renting an apartment.

Before buying a home, get it inspected. A good home inspector will identify problems with a home that can affect its value, such as structural problems, termites, radon, bad electrical wiring, bad plumbing and moisture problems.

If you buy a home, you will need a mortgage to cover the purchase price. Private mortgage insurance (PMI) may be required if you have a down payment that is less than 20% of the purchase price. PMI can end when your equity exceeds the 20% threshold, but you have to ask to have it removed.

The mortgage lender will require you to have homeowner’s insurance to cover the home against fire and other damage to the property. It is a good idea to have homeowner’s insurance anyway.

When you buy a home, there will also be closing costs, such as commissions to the realtors and various taxes and fees.

Points are a form of up-front interest payment. In effect, paying points buys down the interest rate. It is not a good idea to pay points if you expect to move and sell the home before the end of the mortgage term.


In addition to auto insurance, renter’s insurance and homeowner’s insurance, there are other types of insurance policies you might need:

  • Health Insurance. Typically provided through your employer or state insurance exchanges, health insurance may cover medical, dental and vision expenses. While you may be young and healthy, you aren’t immune to accidents and injury. Plus, when you’re younger, your premiums will be lower.
  • Disability Insurance. A disability policy provides you with replacement income if you are injured and unable to work. There are two main types of disability insurance, short-term and long-term. They start after you’ve used up all of your paid sick leave and vacation.
  • Umbrella Policy. An umbrella policy covers your liability beyond the limits in your auto, renter’s and homeowner’s insurance policies.
  • Life Insurance. Life insurance provides income replacement for your family if you die. If you aren’t married and do not have children, you do not need life insurance. If you need life insurance, get a term life insurance policy, not cash value or whole life insurance. Generally, you should get a term life insurance policy with a face value equal to 20 times your annual income and with a term that provides coverage until you reach retirement age.

There are many other types of insurance that you do not need.

Similarly, don’t pay for an extended warranty when you buy equipment or electronics, unless the equipment has a motor (e.g., a clothes washer or dryer, a dishwasher). Electronic equipment that doesn’t involve a motor, such as a computer, is less likely to fail before it becomes obsolete.


Once you get a job, you’ll have to start filing an income tax return and paying taxes for the first time. Unless you are classified as an independent contractor, your employer will withhold federal, state and local taxes, as well as FICA (Social Security and Medicare taxes) from your paycheck. But, you also need to file income tax returns, as your actual tax liability may be higher or lower.

There are software programs that can help your file your tax returns, such as TurboTax, and tax preparation services, such as H&R Block. Some may even be free for simple returns.

You can also learn how to file your own income tax returns using IRS Publication 17.

Dealing with Financial Difficulty

If you run into financial problems, talk to your lenders and creditors. Ignoring the problems will not make them go away, and they may make a bad situation worse. Sometimes, your lenders and creditors may be able to make adjustments to help you get through a period of financial difficulty. These can include temporary modifications to your payment obligations.

Sometimes you may be able to negotiate a lower interest rate or partial forgiveness of your debt with the lender, if the alternative is for you to file for bankruptcy.

If you have problems paying your credit cards, consider getting a personal loan or home equity loan to pay off the credit card debt. A personal loan with a level payment may involve a lower interest rate and reduce the monthly payment.

If you stop making payments on your loans, the lenders may be able to repossess your car, foreclose on your home, seize your bank and brokerage account balances, garnish your wages and offset your income tax refunds.

Identity Theft

Be careful about sharing your personal identifiers, such as your Social Security Number and date of birth. These can be used to open accounts in your name, without your permission.

Consider getting a credit freeze to prevent people from opening an account in your name.

Also be careful about sharing your credit card numbers, bank account numbers and brokerage account numbers. A criminal can empty your bank account with just the bank account number and the bank routing number. They do not need your signature.

If you are a victim of identity theft, visit the Federal Trade Commission’s web site,

Other Resources

There are two books that provide a good overview of financial basics for recent college graduates.

It is also worthwhile for college graduates to subscribe to Consumer Reports. Consumer Reports not only publishes reviews and ratings of products and services, but also provides news and insights about smart money management.

At, our goal is to help you make smart decisions about saving and paying for education. Some of the products featured in this article are from our partners, but this doesn’t influence our evaluations. Our opinions are our own.

A good place to start:

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