Although my oldest daughter recently started college, I’m already thinking about what I’d want her to know about money, investing and life when she graduates. Because I’m probably not the only one with this concern, I decided to write this article.
Quick Answers
For those college graduates in search of a quick bulleted list of sound advice here you go.
- Don’t be afraid to relocate to other parts of the country or world if it will provide a major benefit to your career. Be open minded.
- Once you start working, take advantage of your company’s 401k / 403b plan up to the match. It’s important to get in the habit of investing. The earlier you start, the longer you give compound interest a chance to work its magic.
- If you have student loan debt, focus on paying it off. Outside of serious illness, high debt is the biggest obstacle towards building wealth.
- Avoid buying a home until you know where you’re likely to be for at least the next 5 years.
- Don’t get caught in the lifestyle inflation trap. Continuing to live like a broke college student for a few years after graduating, allows you to make wiser money decisions.
- While you’re off slaying your career dragons, don’t neglect your health. It’s easier to stay healthy than fix problems resulting from years of neglect.
If you have student loan debt, focus on paying it off. Outside of serious illness, high debt is the biggest obstacle towards building wealth.
Following these tips will increase your chances for realizing financial success over time. For those wanting a more detailed explanation, read on.
Relocating After Graduation
Depending on your career, there are likely advantages to being open to relocation. Say you’re in the technology sector. Being willing to move to Silicon Valley, Research Triangle Park (RTP), or Atlanta is likely to provide more career options. Those areas are either already established technology centers or are quickly becoming recognized as one.
As a new graduate, you likely don’t have serious commitments tying you to a particular part of the country. It makes sense to use this flexibility to your advantage. These are the years when you want to maximize your earning potential. With youth on your side, working longer hours is easier to pull off.
Working longer hours and taking on the assignments in locations that no one else wants is a good way to be noticed by management. It’s a great way to move up the corporate ladder faster than your peers with due to this experience. Take it from an older guy, in another 15 – 20 years, your desire to do lots of traveling for work is likely to diminish.
Grind and hustle hard when you’re young. It’s hard to see at the time but success over the next 15 – 20 years is very much front loaded.
Don’t Be Quick to Make Large Purchases
In support of the earlier point on relocating for work, I’d recommend that you not make major housing decisions until the dust settles. Although owning a home is part of the American dream, it’s not something to enter into lightly.
For starters, it’s often difficult to account for the expenses associated with owning a home. The process of buying and selling a home can be expensive. There are closing costs, utilities deposits and the expenses of moving. Don’t forget that there are also upkeep / maintenance costs, yearly property taxes and home insurance. The list of costs associated with a home goes on and on. Be aware before you jump in.
For these reasons, I recommend that you delay buying a home unless you’re likely to be in the area for at least 5 years. You’ll save yourself a lot of headache and retain flexibility. Both are important when you’re young.
Avoid Wholesale Lifestyle Inflation
One of the most important things to avoid when you’re first starting out is lifestyle inflation. When you go from being a broke college student to that first real job making real money, it’s tempting to upgrade all aspects of your life. I’m certainly not opposed to spending and enjoying life but you want to be careful that you don’t go overboard.
Buying an expensive car, boat or expensive wardrobe can put a big hurt on your finances. There’s nothing wrong with enjoying yourself more than the average person in one or two areas. You just can’t do it for everything. In life you’ll find that you can afford pretty much anything – you just can’t afford everything.
In life you’ll find that you can afford pretty much anything – you just can’t afford everything.
The groups that tend to suffer from this tendency the most are freshly minted doctors and attorneys. These professionals make tremendous sacrifices in the 20s to get the education needed for their careers. Once they finally start making money it’s not uncommon to go on a shopping spree to build the material image that most people associate with their profession.
Try to avoid falling into a lifestyle focused on consumerism. An excellent tool that helps prevent overspending is a monthly budget.
Student Loans – Gotta Get Rid of ‘Em
When I was researching this topic, I came across the following article that estimates that approximately 68% of the people that attend college graduate with debt. That’s a huge percentage when you really think about it. One of the most important financial areas to focus on once you graduate are your student loans.
If you have student loan debt, one of your primary goals should be to pay it off as soon as possible. Just because the payments are spread over a number of years, doesn’t necessarily mean you should take as long as possible to pay them off. Make student loan repayment a priority to get out from under that rock. Trying to grow your net worth or even just enjoy life while carrying student loan debt is like trying to run a marathon while carrying an anchor.
Even if you’re facing more student loan debt than the 2012 average of $25,550, it’s still important to chip away at it. Your ability to invest, live the life you want and have freedom to take any job you want, all relies on not carrying a lot of debt. You graduated college because you’re the type of person that can sacrifice and delay instant gratification. Retiring your student loan debt is just one more thing.
If you apply the same effort and focus to paying off your debt as you did to your college studies, you’ll get rid of it. Where focus goes, energy flows. You’ll come up with creative ways to increase your income to get rid of the debt faster than you anticipate. You can do it.
The Importance of Investing
Once you tackle your student loan debt, begin investing money as soon as possible. You probably won’t have much money to start but that doesn’t matter. What we’re primarily doing at this stage is wiring your brain to realize that investing is important. So, as you read this section, don’t become disheartened if you’re not able to apply all the advice immediately. It’s still important for you to know.
If money is well-invested in a stock or index fund portfolio, it will absolutely blow your mind what happens in less than 10 years. Compound interest can do wonderful things for your finances but it does require regular contributions to work best.
Once you start working, be sure to take advantage of your company’s 401k / 403b plan. Assuming you have no debt now is the time to supercharge your savings rate to get your money machine really going.
Compound interest can do wonderful things for your finances but it does require regular contributions to work best.
About the 401k
Most employers these days offer some type of match for their 401k account offerings. The 401(k) is an IRS-qualified employer-sponsored retirement plan that allows employees to defer a portion of their salary on a post or pre-tax basis. Most commonly, contributions are made from pre-tax earnings and grow on a tax-deferred basis. Tax-deferred means the employee isn’t required to pay taxes on any appreciation in value until the money is withdrawn. In a nutshell it’s an investment account that you shouldn’t touch until you retire at 59 ½.
If your employer offers a 401k, be sure to contribute at least enough to get all the free money they’re trying to give you. In most cases the match is between 3 – 6% of your salary. Companies that match your contribution dollar for dollar tend to stay closer to 3%. Ones that match 50 cents on the dollar usually set their match limit closer to 6%. Either way, you should take advantage of this program. It’s tough to beat free money.
After-Tax Investing
I recommend that you also have a traditional brokerage account in addition to your 401k. There are many reasons why you don’t want a 401k to be your only investment account. You’ll have a lot more flexibility in how you’re able to use your invested money. By only putting money into your 401k you’re taking the traditional route towards retirement.
This will mean working until age 59 ½ which might not be what you want. It certainly isn’t what I want. By starting your diversified portfolio of pre and post investments when you’re young, you gain more options. As you’ll learn options and more control of your time are the most important reasons to become wealthy.
For a more detailed discussion on investing complete with a portfolio that should serve you well, check out my guide on stock market investing.
Personal Growth
This is one lesson I’m glad I learned early after leaving college. Realize that even though you just graduated, that college was just the beginning of your learning. In my case I would regularly dedicate time each week towards improving my knowledge in order to become more valuable to my employer.
Increasing knowledge in your area of focus is priceless. Once you have it, no one can take it away from you. Realize that it’s no one’s job but your own to get what you want out of life. If you need knowledge or a skill in some area, it’s on you to figure it out.
Get the help of others when it’s possible and practical to do so. Just realize that the buck stops with you. Don’t expect to be spoon fed everything. Take stock of what your knowledge gaps are and work on improving them. To do your best in life, commit to constant learning and improvement.
Adopt the Japanese philosophy of kaizen. Loosely translated it means continuous change for the better.
Increasing knowledge in your area of focus is priceless. Once you have it, no one can take it away from you.
Take Care of Your Health
Second only to time, your health is your most precious resource. Making lots of money becomes meaningless if you’re too sick to enjoy any of it. Regular exercise does wonders towards keeping your muscles and cardiovascular system in tip top shape. By investing time in your own health, you will be able to function at a higher physical level more easily. You might even make improvements in your blood pressure, blood sugar levels, lipid profile, in addition to other things! By staying healthy, you take care of your body and mind. Don’t forget that regular activity can also help manage stress levels and improve your sleep.
To that end, I’d suggest making physical activity a regular part of every week. It’s much easier to develop a routine that allows you stay healthy than having to correct many years of abuse. I’m a big fan of martial arts, but choose whatever works for you and stick with it.
The goal isn’t to make you the next American Ninja Warrior, but to improve and maintain your physical quality of life for as long as possible. Kaizen applies to more than just business and money.
Don’t Be in a Rush Get Married
The last piece of advice I have for you is around marriage and personal relationships. The statistics show that 40 – 50% of marriages end in divorce. Because of such depressing numbers, it would be wise to consider the lesson it drives home. While there are certainly cases where couples marry early and the relationship lasts their entire life, this is more of an exception rather than the rule.
The person you are when you leave college is likely to be different than the person you’ll become over the next 10 years. Priorities and focuses change. From personal experience I can tell you that even at 25, you likely still have some growing up to do. I know I did. The Greek aphorism to “know thyself” is really important if you want to be successful in a long-term relationship.
Kind of like buying a house, it’s better to wait until you’re settled and know what you want out of life vs. getting yourself into a situation that’s emotionally and financially costly to extricate yourself from.
Concluding Thoughts
Well that’s about it. That’s the advice I would give to a new college graduate. You’ll be happy to know that I didn’t write this article in a vacuum. My daughter who’s currently in college read over it and provided input.
It was her idea to add the additional explanation about what a 401k is and why you should contribute to one. There are several other topics I could have covered such as how to choose insurance or more tips around how to choose a life partner. If you’re interested in those subjects check out my other articles.
Thanks for taking the time to read this. I hope you find the advice useful for your career and personal growth. If I can help with anything or if you’d like to see content on other topics, let me know in the comments below!