Freshly Graduated And About To Get A New Job? Here Are Seven Things To Do To Get Started On The Right Financial Path

In the last few days, a bevy of recent college graduates about to enter the workforce have written to me and asked what they should be doing with their finances at this point in their life. These are the smart ones – they realize that taking a few steps in the right direction now are going to put them ahead of the game for the rest of their lives.

That being said, here are seven things that any recent college graduate should strongly consider doing as they enter the workforce.

Set up an automatic payment plan on your student loans. Call up the people that hold your student loans and see if there are any benefits for making the first twelve or twenty four or thirty six payments on time and also if there’s a benefit for making automatic payments on the debt. Quite often, you can get a half-percentage point or more knocked off by doing these things, but even if you don’t, set up an automatic payment plan. Don’t pay extra, though, unless the loan is very high interest (above 9% or so).

Sign up for the 401(k)/403(b) immediately at work. Ask the person who helps you set it up how much of a match the company provides, and contribute enough of your own to get all of the match. Ideally, you want to contribute enough so that the total of your contribution and the match is 15%. Since you’re just starting out, go with aggressive investment choices.

Start an emergency fund. I recommend setting up an account at an online bank, like ING Direct or HSBC Direct. Their accounts are convenient (especially ING) and they pay a very nice return (well over 4%). Then set up an automatic contribution to this emergency fund each week – $25 is good. Why an emergency fund? This is the money you tap if your car breaks down so you don’t have to go in debt – the interest works in your favor if you put in the money ahead of time.

Get to know as many of your professional colleagues as you can. This not only includes people in your own workplace, but people working similar jobs in other workplaces. Read the book Never Eat Alone and really absorb the advice – it’s incredibly valuable. You’ll eventually find that this group of people is the most valuable thing you can cultivate in your profession, even more valuable than your job over the long term.

Practice frugality. This is perhaps the most dangerous point in your life for letting your spending get completely out of control. Don’t let it. Be vigilant and keep your spending under control. Of course you’re going to want to spend some money right now, but put a very firm cap on it and keep it in place.

Start an investment plan. My advice is to put everything in the Vanguard Target Retirement 2050 fund – Vanguard’s funds are very well managed and they treat you very well. Open one up directly through Vanguard and set up regular contributions to it. Why? This will put you on pace to do whatever you want down the road – it might be a house down payment, it might be the first step towards retirement, it might even pay for some incredibly fun things in a few years like international travel or a BMW – whatever you wish. Just get one started, start some automatic contributions, and let it grow.

Have fun. Do things. Go out with friends. Travel a bit. If you’re going to spend money at this point in your life, don’t spend it on stuff, spend it on experiences. You’ll have plenty of time to get stuff when you’re older and have a house and a family and you’re wishing you had more experiences when you were first starting out.

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  1. Trent, what do you think about tiering your 401(k) portfolio using something like the pyramid investment model? That way the person can have some more secure investments in play that are safer?

    This is the way I am investing my money but maybe because of the general youth of many graduates you’re assuming a higher risk tolerance?

  2. E says:

    Why not pay extra towards student loans? I say, if your student loan(s) are your only debt right out of college, pay them down aggressively (unless there’s a pre-payment penalty which I can’t imagine there’d ever be) to get yourself debt free as soon as possible.

  3. Brian says:

    Randy Peterman:

    That pyramid would be a horrible asset allocation for new graduates…if that pyramid were inverted, then it might work ;)

  4. rstlne says:

    I wasn’t allowed to sign up for the 401K plan until I had been here for a year, so of course, it depends on the policies at your company. But do sign up as soon as you qualify.

  5. js says:

    I wouldn’t mind going back and buying stuff (ie property) when I was younger. The housing bubble in CA, has now made all that permanently unaffordable. Oh but I was young and dumb, and didn’t mind renting then. Now I’ll be renting for life.

  6. Jake Smith says:

    Considering that I begin work in a week’s time – thanks for the advice! I especially like the last pointer on concentrating on experiences as opposed to accumulating stuff…

  7. Mark A says:

    Cultivating connections is ultimately how I got the job I have, and the reason I’m being considered for advanced positions in the future. It helps to impress the president of your organization.

  8. Cindy says:

    Hi Trent,

    I’m trying to follow your savings advice – please send me a referral code for ING Direct. Can you send it soon??? (Third time asking)

    Thanks,
    Cindy

  9. s says:

    Paying down student loans early can go either way, but I’d think usually (at the current student loan rates at least), it’d be better to pay off quick.

    My loans were at almost 8% when I graduated last year (I couldn’t consolidate at the ~6.5% rate because of how my loans were taken out. Fortunately, I only had about 15k in loans, and I was able to pay it off within 6 months of graduating with a very aggressive repayment schedule. Being completely debt free less than a year out of school felt GREAT. And now, I’ve just put a down payment on my first house.

    Since I’m getting a better rate on the mortgage than I had on my loans, it’s pretty clearly a better choice to have paid off the student loans.

    In general though, just like pre-paying a mortgage, it’s a matter of whether you think you can “beat” the interest rate of the loan. My cutoff for where I feel comfortable with the risk is about 7%. I’ll pay off any loan higher than that as quickly as possible, and let anything below stick around with minimum payments.

  10. Jessica says:

    I disagree about not making extra payments on your student loans. If you have no other debt it makes sense to pay these loans off sooner than later-and I’m fairly sure that the interest rate on student loans does not go beyond 8%. (I’m not 100% on that one, but that’s what I seem to remember with my federal student loans.)

    Of course, it would make sense to establish a solid amount of savings first before doing so, for emergencies and what not.

    For myself, I’m trying to work up to switching from the graduated payment plan to the standard plan, even though I have a 2.5% rate on my loans. The graduated plan has been very helpful to me in these first few years out of school (and during my two years of grad school)but my husband and I don’t want to be paying our student loans off at 40, and forking over that much more in interest.

    The other points are great, however, I’ve seen a lot of post-grad friends use the “experience” reason to load up on debt. For some reason that intangible “experience” translates into justifying a want as a need. I figure a lot of the traveling I want to do will still be there and fun in five years or even forty. Turning 30 shouldn’t be some kind of deadline for cramming experiences/adventures in. (Or whatever age is “old” to a person)

  11. Matt says:

    I also disagree with not paying extra on student loans. I have $17k at a floating rate of prime + 2.5%. Currently that equals 8.75% in Canada. My plan is to pay 20% of my gross salary to my student loan debt plus the extra “3 month paycheque.” According to my plan it should be paid off in about 1.5 years. For me, I would rather get it out of the way than have it linger on.

    I should mention though, I live pretty frugally and also will be saving over 12% of my gross salary as well. So I guess I’m not being extremely aggressive towards the loans.

  12. Matt says:

    I just graduated with about $14,000 in private loans at prime + 0% which right now is 8.25% and $12,000 in federal loans at about 5% but will be much less once all the discounts are added in.

    I am going to be paying them off as fast as I can. Why not? This is my only debt. I can’t imagine still paying for them in 10 years. I am doing as much as I can to pay them off fast. I’m currently looking for a part time job(hopefully one that offers tuition reimbursement) and I’m going to devote that paycheck solely to student loans in addition to paying double the minimum with my regular paycheck.

    I’m also going to continue contributing the max to my Roth IRA.

    My roommates both make at least $10,000 per year more than me and had college paid for them by wealthy relative yet complain constantly that they are ‘poor.’ It’s nice knowing that although I make much less money than them I feel I am in a much better position financially then they are…and it feels good. They always ask if I ‘have enough money’ for whatever bill is due but the irony is that I probably have more money in an emergency fund to cover expenses like that than they have in their bank accounts combined. I’ve tried helping them, because they ask frequently, but don’t want to change any of their ways or do any work on their part.

  13. Sharon says:

    I agree with the spending money on experiences rather than stuff. Life has a habit of sneaking up on you and so do what you can now. The housing market has skyrocketed, but that bubble will probably burst and if you have money saved, you will be better prepared. However, your children will need to be cared for and if you don’t have them, your parents will be ill eventually. Don’t go into debt for these experiences, just do what you can. It is also cooler and easier for a person in their twenties to do Europe on twenty dollars a day than a woman in her forties…

  14. Trent Hamm Trent says:

    I no longer have referral codes for ING Direct, as I’ve stated in other threads. That’s why I no longer mention them.

  15. kim says:

    i’m a fresh graduate, working in a mutual fund company. i’ve always wanted to learn the ropes on how to invest my money wisely. i plan to invest 30% of my salary to this mutual fund company, 30% to a savings account in a bank, 30% for my expenses, and 10% for leisure.

    can anyone give me a better advice?
    thank you.

  16. guinness416 says:

    I’d add taking as much company-paid professional development/education/conference attendance/etc opportunities as you can whilst young. They open up doors for other career moves, and you don’t always have the time or inclination to take them when you’re older.

    And fit gym time into your professional schedule as early as possible. Make it a habit for a lifetime.

  17. Michelle says:

    I agree, if you will be spending money do it on experiences and not stuff. I was lucky enough to be able to go to Europe for a month after I graduated and before I had a real job. I was considering not going because of the expense and loss of income, but realized I will never again until I am retired be able to take a month off of work without jeopardizing my career or future family. I never regret this decision, I paid it all back on my credit cards already and will never forget that experience, while stuff I bought a few years ago I have already lost or replaced.

  18. Wil says:

    I am a little confused! It makes sense to me to contribute to my 401k, especially because of the company matching that I receive. The emergency fund/savings account is also an obvious choice.

    I am confused by the Vanguard investment. Is this something in between a 401k (you can’t really touch until you retire) and a savings account (you can easily take money out of and put money into)? Maybe I’m thrown off by the name – is it really a retirement account, or is it something different altogether?

  19. steven says:

    @wil

    Hi Wil,

    The Vanguard Target Retirement 2050 Account sounds like an IRA (Independent Retirement Account). If your company doesn’t offer a 401K, you can start your own Roth IRA.

    I highly recommend Beth Kobliner’s book, Get A Financial Life. It’s the best financial book I have ever read for young people in their twenties and thirties.

  20. Phil A says:

    Not all companies offer a match. I would contribute to a Roth IRA at a highly touted Mutual Fund Company if there is no match. Contributing to a 401(k) without a match isn’t a bad idea. You are still increasing your chances of a more secure retirement.

  21. ryan says:

    I totally agree about experiences trumping stuff. Vanguard index fund is good althought I went with the T Rowe Price index fund because I didn’t have the $3K minimum that vanguard requires. T Rowe Price only wanted $1K. Although t rowe’s expense ratio is slightly higher at 0.79%

    People (and young people especially) need to learn the concept of saving and investing LET YOUR $ GROW!!

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