personal finance

3 Common Money Mistakes Recent Graduates Make, According to Financial Experts

jhosey | Twenty20

There will soon be a new class of college graduates, many of whom will be getting full-time jobs and managing their finances for the first time.

That can be overwhelming. Bills can pile up quickly and if you aren't careful, you could find yourself in debt.

But many financial mistakes can be avoided. Here are three of the most common money mistakes people make early in their careers, as well as how to avoid making the same ones.

1. Not being prepared for your expenses

Living costs add up quickly. It is important to be aware of every monthly payment you are on the hook for so you don't end up spending more than you earn.

"A lot of college students have been living meagerly for years and think that will all end once they graduate and get a 'real' job," says Christopher Lyman, a certified financial planner at Cambridge Investment Research in Pennsylvania. "What many do not realize is all of that income is not extra and will be absorbed by additional expenses that they have not been used to."

One key expense is your student loans. Figure out how much you owe in loans and what your monthly payments will be so you can plan accordingly, Lyman says. By making your payments in full and on time, you can avoid paying late fees and additional interest.

Spending too much money on travel and luxuries without having solid emergency savings for unexpected costs is a similar mistake a lot of people make early in their careers, says Niv Persaud, a certified financial planner and managing director at Transition Planning & Guidance.

You can still enjoy yourself, but keep an eye on your budget. Lyman recommends the 50/30/20 budget strategy: 50% of your salary should be going to your needs (such as rent, food and utilities), 20% should be going toward saving for retirement and 30% can go toward anything else you want.

2. Buying a home before you can afford it

Because many banks will allow you to purchase a home with less than the traditional 20% down payment, many people are encouraged to become homeowners earlier in life. However, that can leave you paying thousands of dollars more in interest, Lyman says.

Here's an example: Say you're interested in buying a $500,000 home with 5% down. By paying only 5% of the cost of the home upfront, you are only getting $25,000 interest-free. But if you make a down payment of $100,000, you can avoid paying interest on an additional $75,000, Lyman says.

That $75,000 difference would cost you around $32,000 extra in interest, assuming you pay a 2.5% interest rate over 30 years.

You should also consider the additional expenses that come with buying a home, including property taxes, home insurance, ongoing maintenance costs, furnishings and unexpected repairs, Persaud says.

If you do not have the income to support these costs, you might not be ready to buy a home, Persaud says. It may be better to wait until you're on sturdier financial footing.

3. Not understanding what your take-home pay is

Another common mistake is spending more than your take-home pay because you don't account for the taxes and payroll deductions for health insurance, parking and other company benefits that will be taken out of your paycheck, says Persaud.

Make sure to read your first paycheck carefully and understand how much you'll actually bring in.

You also need to know how much you will be paying in taxes, especially if you live in an expensive city like New York or San Francisco, Lyman says. You could easily put a significant chunk of your salary toward city, state and federal taxes.

Early in your career, it's likely harder to earn more money than it is to lower your expenses, Lyman says. If you find yourself spending more money than you are earning, you may need to make some cuts.

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