Why The “Average” New Grad Can’t Save Money

It is no secret that getting on your feet is a challenge when graduating from college and beginning a new career. Wages have stagnated across multiple industries while the cost of living in a major metropolitan area has only increased. The goal of this article is to provide a look into why it is hard to get ahead when you are “average”. Average in this case is not necessarily average at all as we must assume that the “average” person has successfully completed their college education and were able to land their first job.

For this example, we will assume the new grad does not have the benefit of receiving any help to get them started. Let’s dive into the costs associated with being average and living in a new city.

Average Starting Salary

2017 college grads are starting off with an average salary of $49,785. STEM (Science, technology, engineering, and math) remain the highest paid degrees fresh out of school. Depending on your degree you may land somewhere above or below but for illustration purposes we will stick with the average.

Median Rent Major Metro Areas

We will assume that this new graduate is not willing to have roommates. They are sick of having a microwave covered in spaghetti sauce and need to stay focused for their new job and not have any distractions. Since they are unwilling to have a roommate they will start a search for a 1-bedroom apartment. Check out this slideshow to look at what it costs in various cities to live in a 1-bedroom apartment as well as the cost of utilities. For our average example, we will use Denver.

Tax Man

I understand that as a reader of this site you are savvy to taxes and understand our progressive tax system. So, in the case of federal taxes you understand that we know this individual making $49,785 will have a bill of $5,068. In addition, they will have to pay FICA taxes which includes social security 6.2% and Medicare 1.45% totaling $3,809. State taxes vary by where you live from 0% to 13.3% for this example we will use 5% as the benchmark or $2,489.

Health Insurance

We will assume that our average new grad will have an employer sponsored healthcare program. Since this example is based off a salary type employee we will estimate that $50 dollars a paycheck is taken out to pay for their portion of the healthcare plan. This can vary quite a bit by the company you work for some are fantastic and you may not have to pay for anything, while others may be high. Personal health needs may affect this number, but we will use $100 a month and not make things to complicated.

Car Expenses

It is no secret that owning a car is an expensive luxury. This is also something that I think many new grads feel the need to upgrade when they get their first “real job”. Nerd Wallet has a great calculator here that you can play with that shows you the cost of car ownership. For our example, I have assumed that the new grad purchased a used car with a lower average monthly payment then is used in the Nerd Wallet calculator. We will assume the payment is $300 a month and insurance/maintenance/gas is $286 a month.

Student Loan Debt

The cost of university has risen over the years and many must take out student loans to receive an education.  The average 2016 graduate left school with $37,172 in debt. This translates to the yet another payment each month that comes in at $351.

Other Expenses

Other expenses I have added in are a cell phone plan at $60. You also at some point are going to get hungry so we will add $400 a month for food. Last, I added a misc. category for entertainment and unexpected expenses of $145 a month.

Big Picture

From the chart, you can see how easy it is to have a good starting salary compared to your peers but still not be able to save anything. So, I would recommend giving up and moving to a beach to cut coconuts in half and sell them to tourists. That may be a bit drastic but what you can do is STOP BEING AVERAGE! Small changes will yield huge results for you when you are getting started. Find ways to save money and put the excess to work paying down loans or investing this will lay the foundation for you to get ahead in the future. If you are conscious about where your money goes you will do fine, just make sure to recognize that no one cares about your personal finance situation as much as you do so act today.

Quick List of How to Avoid Being Average

  • House hack (buy a home and rent out additional rooms) this can save both parties money.
  • Move to a cheaper part of the city/get roommates.
  • Sign up for a HSA if your company offers it to lower your tax bill.
  • Contribute to a traditional 401(k) saving on your tax bill.
  • Lose the car if you can, or get a beater and lose your ego you’re in your 20’s!
  • Make additional payments on your student loans (eventually you will eliminate them and free up more cashflow.)
  • Find something you are good at on the side that can provide you with some additional income as you are working on growing your W-2 income.

What Are Your Thoughts?

  1. How do you fit into some of these spending categories?
  2. Which areas do you find easiest to save money in?
  3. What areas do you think are the hardest to save money in?

Spread The Wealth!

4 Comments on “Why The “Average” New Grad Can’t Save Money”

  1. Man, DM. Young people today are in a very tough position. First, college is screwing them. It’s making them take 40 classes when only 12-15 pertain to their degrees. Our healthcare system is also screwing them. It’s charging them more so old farts like me can pay less. And the truly sad part is that our healthcare system and our college business model aren’t changing anytime soon. I therefore agree with you 100% about not being normal. A young person behaving “normally” will find it next to impossible to save. I live in Charlotte and I would encourage young college grads to seriously live in a trailer. It certainly isn’t fashionable, but two college grads can rent a decent one for around $500 a month. That’s $250 each. I would also implore young college grads to ditch the thought of a new car. Get a POS car for cash. Once a grad has paid off the student loans and has a net worth north of $100K, he or she can consider a new car. Well, I could go on, but leave it at that. Be extra weird with housing and transportation and you have a shot at a decent financial life. Thanks for pointing out the dire situation recent college grads are finding themselves in. And thank you for offering a reasonable solution. F&%k normal.

    1. I love it Mr. Groovy! Thanks for shooting straight it’s very refreshing. I know for a fact that not many young people are willing to take it to that level but I would have to agree with you. At the bare minimum stop whining and bunk up with four other roommates while your still trying to get on your feet.

      My theory is that after the great recession everyone’s parents were scared and sent them to school because that was the “only” way to success. Now the shocking truth for many is that they have a huge bill to pay off and a career path that is unclear and under paid. I am a big fan of delaying gratification and giving myself as many outs as possible in the future. Thanks for commenting.

  2. Good tips!

    Also, most entry-level grad jobs offer paid overtime. You can turn that $49K into $80K. That’s what I did and was able to pay off my $40K student loans within a year before graduating (got the job a year before graduation), buy a condo with my sister, and save $100K in emergency fund/short-term investments.

    99to1percent recently posted…About Our Humble Beginnings