Advice for College Graduates Without Debt

Mary writes in:

“I have a son graduating in May and he has a good job lined up making about $60,000 a year. He has no debt and will have about $1000 in credit card debt. He drives a car that we are hoping will last the next 5 months, not in the best of shape. My question is, I tried looking for advice in Simple Dollar that would be geared towards him. I’d love to forward a couple good articles to him that would pull him into reading your blog. The articles I find seem to be geared toward the college grad that has lots of debt and or no good job lined up. He will feel like a millionaire after being so broke for four years but I know $60,000 will go fast. I also know that if managed properly it will be a big advantage to him. Can you direct me?”

This is a relatively rare position for a college graduate today. The vast majority of graduates leave school with significant student loan debt, so most advice geared toward graduates really focuses on establishing a financial foothold while dealing with that crushing debt load.

Without that debt load, the choices completely change.

Here are my points of advice to Mary’s son.

First, hit your retirement savings hard. This might seem like strange advice considering that retirement is so far off, but just bear with me for a minute.

When you start that job, you’re going to have more years until retirement than you will ever have at any other point in your professional life. Let’s say you’re 22 and you’re going to retire at 70. That’s 48 years.

If the stock market continues its long term trend of returning 7% per year on your money, every dollar you put into retirement during that first year of your career will turn into $25.73. If you put away $1,000 that first year, it will be worth $25,730 when you retire. If you can put away $5,000, it’s going to be worth more than $125,000 on retirement day.

Compare that to the situation if you wait around for, say, twenty years to start saving. That leaves you only 28 years until retirement. Every dollar you save at that point will turn into only $6.65. Just by waiting twenty years to start, you’re losing almost $20 for every single dollar you invest.

There’s another factor, too. Right now, you’re single and you don’t have a lot of expenses in your life. There’s never going to be an easier time for you personally to sock away for retirement.

How do you do this? First, check with your employer about their 401(k) program. If they offer an employer match, contribute as much as you can to get every single dime of matching that they offer. Then, open up a Roth IRA and contribute as much as you can there.

If you hit it hard now, you can ease off in a few years when the circumstances of your life change and your expenses start to grow. For now, save hard.

Second, have a cash emergency fund and always maintain it. Given that you’re young and single, you don’t need a huge one – about a month’s worth of living expenses is perfect. Just keep it in a savings account somewhere and don’t think about it unless you need it.

Why have this? It prevents you from having to dip into debt if a major crisis happens, like a job loss or the engine failing on your car. You just go tap that emergency fund and pay for things, then your only worry is slowly refilling that emergency fund. There’s no debt. There’s no crisis.

Third, figure out what your goals are. Where do you want to be in five years? What about ten years? Do you want to still be working for this company? Do you anticipate living elsewhere? Are you actively seeking someone to spend your life with, or do you plan on staying single? Do you want to start a business?

Everyone has different goals and plans. Spend some time thinking about yours, particularly during your first few months at work.

Once you’ve started to figure out your plans, ask yourself what you can do right now to make those plans happen. Can you save some money so that you’ll have business seed money in a few years? Maybe you’re romantically involved and you might have to pay for a wedding or a honeymoon in a year or two.

Think about those big milestones coming down the road. How much do you need to save each week, starting right now, to make that milestone really easy to cross?

For example, let’s say you’re going to get married in three years. You plan on buying a ring and paying for the honeymoon and you expect it will all cost about $12,000. If you start saving every week starting right now, you can just save about $75 a week in a savings account and you’ll have enough for the ring and the honeymoon.

What if your goals change? If they do, then the savings you’ve already put in place will be the perfect booster for whatever you change your plans to.

Four, don’t worry about buying a home (yet). When you’re young and single, you have the agility to hop on board with lots of different opportunities that come your way. “Buying a home” – which usually means a fat mortgage – means that you’re tying yourself down with debt and home maintenance. Let those things wait for the time being. (In fact, it’s a pretty good idea to just avoid all forms of debt entirely if you’re already debt free. Debt just ties you down.)

A lot of people might tell you that you need to buy a home to build “equity.” Don’t worry about that. Instead, focus on making sure that your net worth is consistently going up. If it is, you don’t have much to worry about, and if you follow the other tips in this thread, it will automatically go up.

If you take these four points seriously, you will be in fine financial shape for quite a while – at least until your life circumstances begin to change. Marriage and children are a whole different ball of wax.

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