Ten Big Tips For Recent College Graduates
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Graduating from college is a big adjustment for most students as s/he has to trade-in an insulated, academic, environment for the so-called "real world." The transition from student to working adult is critical, especially in regard to getting your personal finances off on the right foot. The foundation a recent grad lays in the 2-3 years after graduation often predicts how s/he will lead the rest of their economic life. If the recent grad is interested in a flashy new car, eating out, and living in an expensive city, for example, then s/he often delays saving money, paying off student debt, finding the right career, and being financially independent overall.
Here are some practical steps the recent grad can take to ensure that their personal finance life gets off on the right track (after all, you don't want to be worrying about credit card debt by the time you're 25, right?):
1. Begin paying off your student debt as soon as possible. It's tempting to pay the minimum amount each month (especially if you have a low rate), but debt (outside a home mortgage) is a bad thing, so focus first on paying off your student loans (do this at all costs, no one wants to be paying off student debt at the same time they see their first gray hair!).
2. Continue to live with your parents and do not get an apartment. If you're lucky enough to have parents who do not force you out (just because you're over 18) or charge you to live at home, then you've hit the lottery (just think: free food, heat, water, TV, Internet, etc.). Your parents can actually be cool to hang out with (just make sure to have plenty of wine in the house)
3. Do not buy a new car. As I've said before, a new car is a colossal waste of money (whether you are 22 or 60) given that most new vehicles depreciate an average of 45 percent in the first three years! Take the bus or mass transit or look for a bare bones used car that has basic safety feature like stability control, airbags, ABS, etc.
4. Pay for things in cash and if you don't have cash then don't buy it. This tip is really about controlling how you use your credit card. It's ok to have one and use it but be sure to pay off the full balance each month (this will actually help you build a good credit score so that when you go and buy a house you'll get a better mortgage rate and don't have to ask Aunt Peggy for the down payment).
5. Max out your 401K contribution immediately, especially if your company offers a match. There's plenty of data that states that the sooner you start saving the faster your money will compound. And remember that you're saying no to free money if your employer offers a company match!
6. Create an emergency cash fund. I like to have 6 months of living expenses as an emergency fund, some folks say 3 months but having more money in the bank makes me feel all tingly and safe at night.
7. Take risks with your career / job. Now is the time to develop a business or work extra hard at work and demand more responsibility. Just think, there is really nothing at risk: most new grads do not have a family, mortgage, car payment, etc. so you can let your career or business idea be at the center of your universe.
8. Network. Keep in close contact with ex-student friends, professors, etc. The ex-Prof you had beers with may help you land a job or know of alumni that can help.
9. Think like an entrepreneur and don't settle. Your brain is actually sharper in your early twenties and things like critical thought, logic, and creativity will only worsen with age so think big and try to develop the next great consumer product, web site, information product, non-profit, etc. Oh, on the settling part, if you think you have a certain feeling that you would be good at something, but see a direct path to be a lawyer or teacher don't settle for a teaching gig, for example, just because it's safe. Anything that's worth something requires failure and not settling for mediocrity (nothing against lawyers and teachers!).
10. Delay getting married and starting a family. This one may be subjective, but I don't see any reason to rush into getting married and starting a family. If you get married you'll need your own place and kids are often a close second (and those little guys require $$$)
Are there things I've missed or that I've gotten totally wrong?
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March 11, 2009 4:59 pm
I agree completely with 1-9. As for don't get married? Sure, there is an upside to staying single, but I think most people don't choose when they are going to fall in love. I agree the biggest downside is you immediately require your own place, usually for just the two of you, and can be a lot more expensive than rooming with friends. And having kids young can sometimes turn out to be a good thing because you aren't too old when they are adults or near adults and can really kick your career into high gear.
But 1-9 are spot on. So many people my age have great jobs and great salaries and those student loans really kill you. I think for #2 I'd only add save up as much money as you can while living at home. Set up an automatic withdrawal of what you think rent will be when you move out and have that automatically go into a savings account. Never again will your expenses be this low so SAVE SAVE SAVE because when you move out and later need a car (used) or decide it's time to buy a home you will be SO glad you saved that money, it is great for an emergency fund and great for long term goals. Otherwise you'll just spend away that full time salary and it will be much harder to adjust when you are paying rent.
March 12, 2009 9:52 am
Hello Vincent-
Thanks for this post. I'm attracted to any writing that deals with "transitions" from college to "the real world"--as this is the very suite of topics I address on my blog.
I'm intrigued by these ideas, especially as they get at a subject that we rarely deal with as students: personal finance. I appreciated the straight-talk when it comes to prevention (don't build debt) and cure (pay off existing debt quickly).
There are some points I have to disagree with, however. I think maximizing contribution to your 401(k) has to be questioned at this point, right? I say this without much confidence and with some recognition of my own hypocrisy--I devoted 30% of my salary after college to my 401(k) and used the interest/principle 3 years later to buy my first house. At the same time, the way the market looks now--it seems like the market may not be the best place for the money. I don't think we've seen the bottom yet.
On the same note--and I can't believe I'm about to say this--I think there is a role for credit in economic/financial security. When those recent grads want to become recent homeowners, they will need to prove that they can handle debt. Let's assume they do not have student loans to pay back (like me)--where else do underwriters look to prove that loan appplicant's history? To credit cards. I was unpleasantly surprised to learn I would in effect be penalized for not accruing debt in past lives. The fact is, using credit cards is how you up your credit score, which is a major part of your success in home-buying.
Also, though I know your post does not need to cover *everything* a person can/must do to be economically smart, there are many habits we can pick up that help us remain frugal, fun, and financially sound. I would love to hear your thoughts on how to build better shopping/consumer habits into our daily routines.
Thanks for your thoughts here-
Andrew Stuhl
March 12, 2009 11:07 am
@Andrew, if you're counting on dollar-cost averaging, this is a great time to be maxing out a 401(k) or other retirement account.
I also agree that there is a place in an economic plan for disciplined use of credit. The key word, though, is "disciplined." If you can afford car payments of $200 a month, don't buy a car that requires you to pay $250 a month.
Although I have carried small balances on my credit card, for a number of years now Mr. Nonymous and I have paid our balances in full each month. Really, that's not much different from cash--as long as we don't charge more than we can afford to pay off. And that's also why I feel good about having carried small balances in the past. Yes, I paid fees to the credit companies that I otherwise wouldn't have. But I also demonstrated that I could pay that balance down over time, and that's an important thing for them to see as well.
March 12, 2009 12:30 pm
@miles
You are right about not being able to control when you fall in love, but it does not mean that you need to get married right away (too people can be deeply in love without getting married, as odd as that sounds). Automatic savings is a great tool!
@andrew
I actually think this is a perfect time for young people to be contributing towards a 401K plan (funds are very undervalued and you'll get lots of return over a 30 year period). A 401K shouldn't be looked at every 6 months, especially if you're 25 years (simply keep on contributing to the plan and move away from aggressive funds as you start to approach the age of 50 or so (so you don't get killed by a downturn in the securities market, like we're experiencing currently). On the credit thing, young folks should use a credit card but aim to pay amount owned every month (this way credit bureaus see that you can pay back money). On the shopping thing, buying stuff is really about purchasing only what you need (not what your friends have or what you see in a banner ad or TV commercial).
March 16, 2009 12:38 pm
I don't agree with #2, personally. While plenty of people lived in an apartment or dorm or other similar arrangement during college and added on to the mountain of debt the author is so critical of, some of us lived with our parents for four years in order to avoid the additional cost burden. By the time graduation rolls around, I want to get the hell out of there and start living a more independent life that plenty of people took for granted during their college years.
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