Money Management

Automatic transfers can make it a lot easier to get rich. Read on to see why it’s worth making this easy move as soon as you get your first job. 

When you are a new college grad, you have to make a ton of financial decisions. You’ll need to decide what credit card to get once you’re fully an adult and can stop using your student card. You’ll need to think about where to live, how much to pay for your housing costs, what car to buy, and what job to take.

But, while all of these decisions are going to affect your life in big ways, there’s one choice that stands apart from the others. If you can do just one simple thing when you become a new grad, you can set yourself on the path to financial security in your later years. Here’s what it is.

Do this one simple thing as a college grad to build a secure future

After you have graduated from college, there’s one move you need to make that is going to have a huge impact on your future. You need to set up automatic investments and savings transfers.

See, you aren’t yet used to living on your new salary as a new grad. Your lifestyle has presumably not yet expanded to fit your new income since you’re just getting started in your new career. Since lifestyle creep hasn’t happened yet, you probably don’t have a bunch of financial commitments you have to fulfill and you aren’t yet used to a certain standard of living that your post-degree salary can provide you with.

Before you become used to living on your entire salary at your adult job after graduation, you can arrange to have some of that money go automatically towards your retirement savings. You can have the funds put into your 401(k) if your employer offers one. If not, you can open a retirement account with a brokerage firm and arrange an automated transfer of money to it on payday. You can also arrange to have some money moved into a high-yield savings account if you want to save for other things besides retirement.

Ideally, you should save about 20% of your income, so set up automatic transfers of that amount of money after graduation before you even get a single paycheck at your post-degree career.

Why will setting up automatic transfers as a new grad make such a difference?

Following this advice can be life-changing for a few key reasons.

First, if you make saving a habit right away and immediately devote income to it, you won’t ever get into the habit of using that income for anything else. It just won’t be there for you to meet your short-term needs, so you won’t expect it to and you’ll arrange your financial life around not having it there.

Second, if you set up automated transfers of your money to the right place, odds are good you’re going to stick with the status quo. It will be a lot of hassle to turn off those automatic contributions you’ve set up and you’re less likely to go to the trouble to do that when you know deep down investing for your future is the right move.

Third, and perhaps most importantly, if you start investing as a new college grad, you are going to have time and compound interest working for you. Over decades, your money can earn returns that are reinvested and earn returns of their own. Since there are so many years for this to happen, you can turn a pretty small amount of money into a huge sum.

For example, if you start investing just $250 a month at age 21 when you graduate from college, by the time you hit age 65 and have been investing for 44 years, you would have a nest egg of close to $2 million, assuming you earned a 10% average annual return. But, if you waited until age 30, you’d have less than half that amount, ending up with $813,101.21.

If you want to be a wealthy retiree with minimal effort and you’re a new college grad, take this advice and automate your investment contributions right now. Even if you can only contribute $100 or $10, start investing in something. You’ll be very glad you did when you’ve seen your wealth grow virtually effortlessly over time.

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You may be tempted to jump at the chance to buy a home. Read on to see why it’s important to scope out several properties before making an offer. 

These days, home buyers don’t exactly get a lot of options in the course of their house hunting. The National Association of Realtors reports that as of the end of April, there was only a 2.9-month supply of homes on the market. That’s well below the four- to six-month supply it commonly takes to meet buyer demand in full.

Low inventory can make it challenging to buy a home, so if you’re looking for one today, and the first property you see appears to be suitable for you, you may be inclined to make an offer on it. But doing so could end up being a big mistake.

You may not know what you’re missing

You might look at a given home and think it checks off all the right boxes. But the more homes you look at, the better a sense you might get of what you really need out of a property you buy.

Let’s say you look at a home with a decent-sized kitchen and decide you’ll make an offer. You might, after looking at several homes, realize that based on your family size, you need more cabinet space and room for a larger fridge to adequately feed your family. That may not become so obvious to you until you scope out different spaces and realize that other homes in your target neighborhood offer more kitchen space.

Of course, this is just one example. The point, however, is that buying a home is a big commitment. You’re signing a mortgage loan that you may end up paying off over 30 years. And you’re locking yourself into various expenses that include property taxes and homeowners insurance.

So it’s important to be confident that you’ve chosen the right home. And going with the first property you look at might lead to a situation where your home ends up lacking features you really want.

Don’t be pressured by low inventory

You may feel compelled to make an offer on the first home you see because real estate inventory is so low these days. But if you give into that pressure, you might regret your choice later.

If you happen to get a really good impression from the first home you see, and you think it’s a contender, have your real estate agent get a feel for how quickly you need to act. If there’s already another offer on the home, you might lose out if you don’t make an immediate offer yourself. But if there aren’t other offers at present, you may have time to look around before circling back to the seller.

Either way, buying a home is a decision you shouldn’t rush. So it’s important to look at different options in the area you want to live in.

Also, think about it this way. If you’re inspired to make an offer on the first home you see and there’s already at least one other interested buyer, chances are, you’re going to land in a bidding war, which you may not want. So either way, in that scenario, looking at other homes before making an offer may be your better option.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
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My friend bought a new car before selling her old one. Read on to find out how it’s impacting her purchase and her finances. 

Recently, my friend told me about a financial mess she had gotten herself into. It all started when her car was giving her trouble and she opted to purchase a new one. Unfortunately, things didn’t turn out as planned and her checking account took a really big hit because of it.

Here’s what happened.

Getting a new car before selling the old one could be a recipe for disaster

When my friend decided to buy her new car, she wanted to move forward ASAP because she was tired of dealing with her unreliable vehicle. So, here’s what she did.

She looked up the estimated value of her current vehicle online and found out it was valued at just a little bit more than she owed on it. Armed with this information, she went to a car dealer and bought a new car. They didn’t offer her the amount she wanted for her vehicle as a trade-in and the amount they did offer wouldn’t have been enough to pay off her car loan. So she decided she’d sell the existing car privately after she bought her new one.

The car dealer approved her for a loan on her new car, even though she still had her current car loan, and off she went with her shiny new vehicle and a new car payment to go with it. Then, the problem arose.

A financial mess resulted due to this big issue

It turned out that no one was actually willing to buy my friend’s car for the stated value online — or anywhere close to it. In fact, the best offer she got left her more than $2,000 shy of the amount she’d have needed to pay her car loan.

So, now my friend is stuck with a car she cannot sell for enough to repay her loan. And, not only does she not have the money to pay the difference, but she also can’t qualify for a personal loan or credit card to pay off the extra $2,000 because of the fact her credit record shows she has too much debt due to the two car loans.

Sadly, she has no choice but to keep both cars and both car payments until she saves enough money to make up the difference between what the car is worth and the amount she still owes on it. Since she’s stuck with two car payments eating up most of her extra income, it could be years before that happens.

Be sure to avoid the mistakes my friend made

The mistakes my friend made could happen to anyone, but there are ways to avoid them.

First, if you are buying a new car, don’t move forward until you actually have sold your old one. This may mean you could be without a vehicle for a few days, but that’s better than ending up in this situation.

Second, don’t assume that because you’re approved for a car loan, you’re going to be able to afford it. My friend really should not have been approved for that second loan when she still had her first one, but car loan lenders don’t really care if they create financial hardship for you.

Third, when you do buy a car, aim to get a loan with the shortest payment term you can afford and try to make a hefty down payment so you don’t end up underwater in the first place.

Taking any or all of these three steps will help to ensure you don’t find yourself in the mess my friend is in. I just wish I’d been able to give her this advice before she ended up dealing with a financial disaster.

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When we got married, we used the bulk of the money our parents had saved for a wedding to put a down payment on a home. Find out why this was a good idea. 

In 2022, the average wedding cost $30,000, according to The Knot. That’s a huge chunk of change to come out of your checking account.

When I got married over a decade ago, the average costs weren’t quite so high — but they weren’t much lower either, coming in at around $28,427 in the year I tied the knot.

When we decided to get married, we considered having a lavish wedding — especially since both my husband’s parents and my parents were willing to contribute some money towards the big event. But, we made a different decision instead, and it’s one that’s paid off for us big time.

A small wedding opened up the door to a home purchase

When we got engaged, both sets of parents offered some money to us, which amounted to close to $30,000 between them. This was a huge amount of money and we were really grateful that our parents were able to help us out in that way.

But, when we started thinking about moving forward, we just couldn’t justify spending that kind of money on a one-day event — especially since it’s not as if our parents were millionaires and the money didn’t matter to them. We knew that they had worked hard to save it and we wanted to do something meaningful with it.

So, we ended up talking to them about whether they’d be OK with us having a smaller wedding and using a good portion of that money towards a down payment for a home instead. They were not only OK with it, but they were excited about the idea that they could help us to do something that would enable us to set down roots.

Our $5,000 wedding ended up being just what we were looking for

After some careful consideration, we decided to have a very small wedding at the house we were able to buy with an affordable mortgage loan thanks to the wedding fund that turned into a down payment assistance fund. To celebrate with the rest of our loved ones, we’d have a larger casual picnic in the backyard the next day.

Both of the events that we had cost us a combined total of around $5,000, leaving us with a lot of extra money for a down payment and putting our total at about $23,000 less than the average wedding cost during the year we got married. And that was with a great vintage wedding dress I found online, some unique food options (including a crepe station at the ceremony), and a beautiful wedding cake made by a friend of mine as a wedding gift.

We didn’t end up having to spend a fortune to have a memorable day, and we still live in the house that we bought with the down payment fund, so the gift our parents ended up giving us turned out to be very long lasting.

Of course, not everyone is in a position to get money from their parents for a wedding. But if you are thinking about spending anywhere close to the average wedding cost — either from your savings or by borrowing — it may be worth considering whether a small, simple, and beautiful ceremony could work for you while opening up the door to do other great things with the rest of the cash.

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A cash-out refinance can be a great way to tap your home equity. Read on to learn more. 

When mortgage rates are favorable, it can often pay to do a refinance. During a traditional mortgage refinance, you borrow the exact amount of your existing loan balance, thereby swapping your old loan for a new one with different terms (ideally, terms that include a lower mortgage rate).

With a cash-out refinance, you borrow more than your remaining mortgage balance. You then get the extra money as cash that you can use for any purpose.

Here’s how this might work. Let’s say you owe $200,000 on your mortgage but you have a home worth $400,000. Let’s also say you need $40,000 to renovate your home or do something having nothing to do with your home, like start a business.

A cash-out refinance would allow you to borrow $240,000. The first $200,000 would be used to pay off your current mortgage, and the remaining $40,000 would go to you in cash form.

In 2021, 60% of all mortgage refinances were of the cash-out variety, according to data firm Black Knight. And that makes sense, because back then, mortgage rates were very competitive.

These days, a cash-out refinance is less appealing on a whole because mortgage rates are pretty high. But it could still be a good way to tap your existing home equity.

And also, it may be that you happen to have a higher interest rate on your mortgage because you signed it at a time when your credit score wasn’t great. So today’s rates may actually be lower than what you’re paying anyway.

That said, cash-out refinance borrowers risk falling into a big trap. And it’s one you’ll need to be careful to avoid.

Don’t get in over your head

A cash-out refinance can be tempting because it gives you a way to use the equity you have in your home to your benefit. But because that equity can be fairly easy to access, you might end up in a situation where you’ve borrowed too much and begin struggling to keep up with your housing payments.

It’s often the case that a regular refinance will lower your monthly mortgage payments. A cash-out refinance has the potential to raise your monthly mortgage payments because you’re taking cash out of your home, and you need to pay off the extra amount you borrow. That could lead to a situation where you fall behind on your mortgage payments, thereby putting you at risk of losing your home.

Time your cash-out refinance strategically

It’s a good idea to look at a cash-out refinance when borrowing rates are generally favorable. And it’s also a good idea to pursue a cash-out refinance when your credit score is in good shape, since that makes it more likely that you’ll end up with a competitive rate on your loan (or at least competitive in the context of where borrowing rates are at the time).

But just as it’s important to get your timing right with a cash-out refinance, it’s equally important to crunch the numbers before you sign one so you’re sure you can handle your new monthly loan payments. The last thing you want to do is borrow too much and put yourself at risk of foreclosure.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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