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Hello College Grad! Welcome To the Real World


Imagine a place where your credit score is more important than your grade point average.

Imagine a world where your credit score is more important than your grade point average.

If you feel like you've fallen down Alice's rabbit hole, welcome to a strange place known as the real world, kiddo.

"One of the biggest mistakes recent college graduates make is quickly trying to replicate a lifestyle it took decades for their parents to achieve," says Stuart Ritter, a certified financial planner for T. Rowe Price who also teaches a class in personal finance at Johns Hopkins University. "Some students want a car, a house, HBO -- everything -- before they have the income to support it. Minyanville's Tips for June Grads Recent graduates need to be patient."

Ritter says students who take on heavy debt to buy a fancy new car, a large screen TV and other trappings of a middle class life damage their long-range prospects for financial advancement.

Put down Architectural Digest and think of cinderblock bookshelves, a used car and a so-so apartment as tres chic frump, and remember that your parents probably had lawn furniture -- or worse -- in their first apartment.

Some June graduates simply whip out the credit card and spend money they don't have. These kids don't understand that how they handle credit and spending right after graduation can affect their financial future. It comes down to your credit score: Play loose with your credit cards now, and you'll get hit with a higher interest rate on a car loan and may have trouble buying a house later.

Many recent graduates regularly review their pay stubs, but not their expenditures. You need to know how much you're spending and where your money goes each month. If you don't, you may soon find yourself squeezed by debt. You can avoid this trap by drafting a budget - and sticking to it.

"Get the money before you buy things," Ritter says.

Use your budget to look ahead. Plan your expenditures rather than simply tracking what you've spent. Start by breaking expenses into three general categories: needs, wants and dreams. If you understand the difference between needs and wants, you'll be ahead of most people, as evidenced by the nation's crushing consumer debt.

Needs include the basics such as rent, utilities, food, gas for the car, routine maintenance, insurance and monthly payments on your student loans. Take money to cover these items off the top of your take-home pay each month to determine how much you have left for wants and dreams.

You want to catch the latest hit movie, but life will go on if you miss it. Going to the ballgame, eating out or a new flat panel TV should also be filed under wants. Dreams include special things such as a trip to Europe or skiing with friends.

Don't forget savings because the earlier you start, the easier it will be to set aside money each month and the faster your nest egg will grow. Take money off the top each month and transfer it to your savings account. If you plan to save whatever is left over at the end of the month, you'll quickly discover that expenses have a way of expanding to consume available income.

Your savings will quickly add up: $100 a month totals $1,200 a year - plus interest. Think what setting aside $200 a month or more would do.

Credit can be seductive. Some recent graduates fall for unusually low introductory interest rates, forgetting, or ignoring, the fact that market rates soon apply. Don't sign up for a credit card offered at the cash register by department or specialty stores. Many retailers offer 10% off the purchase if you open an account that day, knowing they'll make it up on interest payments if you don't pay the balance in full each month. Some recent graduates open multiple accounts, believing they're smart to save 10% on a string of purchases. But keep in mind that each application requires a credit check and too many inquiries can lower your credit score, driving up the cost of future loans.

Think: How many credit cards do you need? A Visa (V) or MasterCard (MA) issued by a major bank such as JPMorgan Chase (JPM), Wells Fargo (WFC), Bank of America (BAC) or Wachovia (WB) will cover you in most cases. Many cards also serve as a debit and ATM card, providing all the basic financial services you'll need.

You may want a card from a major oil company such as Chevron (CVX), ExxonMobil (XOM) or ConocoPhillips (COP), but most stations now take bank credit cards at the pump so it's probably unnecessary. In any case, shop for gasoline on price. Don't buy a particular brand because you have that company's credit card.

Limiting the number of cards you carry also cuts the risk of identity theft and makes it easier to close existing accounts if the cards are lost or stolen.

Be sure to pay the balance due on your credit card in full each month. This will strengthen your credit rating and you'll avoid the monthly finance charge of 20% or more that will eat you alive if you carry a balance from month to month.

Learn the difference between "smart" and "stupid" debt. The first gives you a long-term advantage, such as a student loan to complete your degree or a mortgage to buy your first house. It's stupid to run up credit card debt for groceries, household supplies, dinner or entertainment because the interest charge increases the cost and spreading payments over several months will hammer your credit rating.

If money lands in your hands from a birthday gift, inheritance or tax refund, think about using it to reduce debt, especially if you're carrying a hefty balance on your credit card. If debt is under control, consider adding the money to your savings account. Avoid the temptation to treat the windfall as mad money to be spent on foolishness.

Keep your personal finances as simple as possible. Handling your money wisely in the real world isn't difficult if you limit spending, pay your bills on time and remember Henry David Thoreau's observation: "We are happy in proportion to the things we can do without."
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