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playful-828594_640You’ve just graduated from college and you’re beginning your first job. You find yourself suddenly faced with a massive variety of financial decisions that you may have never needed to make before.

Among other things, you need to decide how much money to spend on your housing, how much to set aside in your retirement account, and how aggressively to start repaying your student loans.

You may also be building your personal savings for the first time.

This can be overwhelming. If you’re new to the process of managing your finances, the following guide can help.

We’re going to walk through all of these considerations, one by one, so that you can get a better handle on how to kick-start your adult financial life.

Getting Your Housing Costs Under Control

Most Americans find that their three biggest expenses are housing, transportation, and food.

Being incredibly careful about how you spend money in these three areas can be the single biggest step to keeping you on a solid financial path.

The general rule of thumb is that housing shouldn’t consume more than one third of your income. In other words, if you earn $3,000 per month, you should be spending no more than $1,000 per month on your housing.

Of course, the lower you can get this number, the better. Don’t be afraid to continue living with roommates for several years after college graduation. Ignore the social pressure that says you should live by yourself simply because you have a diploma.

The longer you can keep your housing costs down by living with roommates or renting a small studio apartment, the more room you’ll have within your budget to achieve other financial goals. You could get rid of your student loans or make serious progress towards saving for a down payment instead.

On a personal note, I lived with roommates until I was almost 32. You might look at that sentence and think of this confession as sad. You might think of it as evidence that I didn’t get my financial life together until then.

On the contrary, by the time I stopped living with roommates, I had amassed a sizable investment portfolio valued at several hundred thousand dollars. I was able to do this, in large part, by keeping my day-to-day expenses as low as possible and investing the difference.

While my friends were getting their hair highlighted, treating themselves to pedicures, and living in spacious two bedroom apartments, I decided I would defer those luxuries for a few additional years so I could focus onkick-starting my investments.

The point of this story is to illustrate that the decisions you make when you are in your early twenties can have a lasting impact on your lifetime net worth.

Don’t be afraid to make decisions that are slightly against the norm. Refrain from buying all of those trappings that are exactly that – items that keep you trapped financially.

Drive an older car, live in a smaller dwelling, and maintain a frugal lifestyle while focusing on ways you can boost your income and earn more. You can then devote your twenties to setting yourself on a smart financial path. Your future self will thank you.

In summary, focus on housing costs first, and embrace the possibility of living with roommates for a little while. When you’re done with that, turn your attention to the next major expense: transportation.

Spending Less on Transit

Are you are fortunate enough to live in an area where getting around on public transportation or through bicycling and walking is a realistic possibility? Then make every effort to live a public transit-based or a pedestrian/bicycle-based lifestyle for as long as you can.

Remember that gasoline isn’t your only car related expense. Every month that you own a car, you’re also paying for insurance, repairs, maintenance, and vehicle depreciation.

That last point, vehicle depreciation, is the worst as it’s not an expense that people feel. That’s because it’s not a literal bill that you pay. However, that doesn’t make it any less of an expense. Vehicle depreciation wipes away your net worth, sometimes to the tune of thousands of dollars a year.

The longer you can get by without having a car, the better. But if you must buy a car, make every effort to pay cash for an old beater car.

The first car I ever purchased was $400. That’s not an error; many people assume that I’m missing a zero. I drove that car for a year-and-a-half, and later upgraded to a vehicle that cost $3,000. I paid for both of those in cash.

Buying an inexpensive used car, ideally with cash, will lower your financial stress, improve your liquidity, and give you more options.

Cutting the Cost of Food

Finally, the third biggest expense that most people deal with are food costs. Young people in particular may be paying a lot of money for prepared foods, including restaurant meals, delivery, and take out. The more you can avoid or reduce these costs, the better.

I don’t recommend becoming a gourmet cook, unless that’s your hobby and you have the time to indulge in it. Don’t get caught up in the lifestyle that fancy cooking magazines and websites promote. You only need to learn two or three very basic healthy dishes, and cook those repeatedly. For example, you might learn a Mexican dish, a low-carb Italian Dish, and a Thai dish.

Cooking just those three dinners, eating each one two times a week, will give you a good amount of variety. It will also reduce your stress levels and increase your efficiency. You won’t have to worry about what groceries to pick up or the amount of time that you’ll spend cooking because you have your routine nailed down. In fact, you can even bulk cook everything on a Sunday, put it in the refridgerator or freezer, and spread it out throughout the week.

Generating Side Income

Now that you’ve addressed the top three spending categories, it’s time to turn your focus in the other direction. You need to find additional ways to boost your income.

You’re most likely working at an entry-level job, which means you’re probably not earning much. One of the best ways to increase your net worth, particularly at this stage of the game, is to look for side income opportunities during the evenings and weekends.

Could you freelance or consult within your field? If you’re involved with marketing or PR, or if you were an English major, you may be able to pick up freelance jobs as a writer. If you have an artistic side, you may be able to freelance as a graphic designer.

Think about what skills you could possibly offer that other people would find valuable, and then turn to the internet to look for a marketplace for those skills. Spend some time networking with other people who earn either a part-time or full-time living with those skills, and read the blogs or the books that they publish to find specifics on how you can start bringing in side income.

If you aren’t sure what professional skills you can offer, or if you don’t want to make that level of commitment and effort, another alternative would be to pick up a few shifts waiting tables, moonlighting as a bartender, or babysitting.

Think about the way that you earned money in college, and continue along that path for a few more years. Remember, you don’t need to do this forever, but spending a couple of years earning a little bit of extra money now can make a big difference in the savings that you have.

Matching Contributions for Retirement Plans

Now that we’ve covered saving and earning, it’s time to focus on what you should do with this additional money in your budget.

First, find out whether or not your employer offers a matching 401k contribution. If so, put enough money into your retirement account that you take full advantage of this match. If you don’t, you’re leaving money on the table.

What is a matching contribution? Let’s assume that you make $50,000 per year. You decide to put 5 percent of that income, or $2,500 per year, into your 401k. Your employer also offers a dollar-for-dollar match up to a maximum of 5 percent, meaning that the employer contributes an additional $2,500 into your 401k. You now have a total of $5,000 in your retirement account, only half of which came out of your paycheck.

I hope it’s obvious why this is such an important opportunity to max out. Taking full advantage of your employer match should be your single biggest priority, even above accelerating your debt payoff.

Speaking of which…

Debt Payoff

If you have any debt, you need to take a look at all of it. You can order your debts in one of two ways:

By Interest Rate: List your debts in order of interest rate, from highest to lowest. Make the minimum payment on every debt, but then throw all of your additional money at the debt with the highest interest rate. Keep chipping away at that until it’s gone.

By Balance: List your debts in order of balance from lowest to highest. Make the minimum payment on every debt, but throw every dime of your additional income at the debt with the smallest balance. Once you pay it off, you will feel the psychological victory of crossing this debt off of your list. That will serve as motivation for you to continue aggressively repay your debt.

Both of these are popular debt repayment methods, and neither option is better or worse than the other. Pick whichever one works for you.

There’s no point in getting caught up in a theoretical debate about the two repayment strategies. The most important question is whether or not you’re getting results. Choose the strategy that is most likely to help you achieve debt freedom.

Establishing an Emergency Fund

Finally, build an emergency fund that represents at least 3 to 6 months of your basic living expenses. Some people take this a step further and recommended that your fund cover 6 to 9 months, but since we are getting started, aim for 3 to 6 months, which will feel less intimidating. Remember, you can always save more later.

Keep your emergency fund separate from the rest of your accounts. You don’t want to co-mingle this with the savings that you’ve set aside for annual expenses, like holidays or vacations.

Keep your emergency fund out of sight and out of mind to give yourself the best chance of not tapping it anytime you find yourself a little short on cash.

Meanwhile, in a separate savings account, save money for annual or occasional expenses such as holiday gifts, traveling, wedding-related costs (i.e. being a bridesmaid or groomsmen in friends’ weddings!), routine car repairs and maintenance, making a security deposit on an apartment while you’re still living in your current apartment, and any other expenses that come up on an irregular but predictable basis.

Final Thoughts on Setting Yourself up for Financial Success

The beginning of your adult life can be difficult because a lot of expenses hit you at the same time. You need a place to live, and then you have to pay for furnishings, transportation, occasional travel, and many of the other expenses that accompany adult life.

You have to pay for this at a time when you have no past earnings or savings (because you’re new to being an adult), and at a time when you’re earning an entry-level paycheck.

The key to navigating through all of this is to live significantly below your means and to keep finding ways to earn more money. Depending on the type of job that you have, you could angle for a promotion at work, create a side income stream, or both.

If you can increase your earnings while continuing to live like a college student for just a few years longer than necessary, you can start your life on strong financial footing.

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