A few weeks ago, I put out a call on Twitter and on Facebook for detailed posts that people would like to see. I got enough great responses that I’m going to fill the entire month of July – one post per day – addressing these ideas.
On Facebook, Brittaney asked “what should every soon to be college graduate know about finances before entering the real world?”
This is actually a surprisingly difficult question to answer because different college graduates find themselves in very different positions. Some have crippling student loan debt, others have a little, others have none. Some have credit card debt, while others do not. Some have a degree and a resume that’s going to make it easy to find a job, while others will not. All of these factors are going to result in very different life trajectories when students leave college.
The question really is what advice is useful to all of these people? Here are the pieces of advice I would give to outgoing students in all of these situations.
1. That thing you really want? You don’t need it.
The single most effective tool that people have in their personal finance toolbox is self-control. A lack of self-control causes people to make purchases both big and small that go beyond what they can actually afford, which eventually results in accumulated debt and a lot of difficulty. It also encourages people to slack off on their career progress and in other areas of their life, but we’re focusing on finances here.
Whenever you feel like you’re making good money and you deserve some unnecessary item, wait. Give it thirty days. If you still want that item, go ahead and buy it. If you decide that you don’t want that item and instead want something else during that period, switch to the new item and restart the clock. This will give you plenty of time to think about the purchase and decide whether it’s really something you want to do – and if you come through on the other side with a big “yes,” you’re likely okay making that purchase.
Another powerful tactic is to leave your credit cards at home. Go out just with a bit of cash in your wallet – no credit cards, no debit cards. Spend that cash. When it runs out, you’re done. There’s no way for you to turn to the plastic in the middle of an excursion for more drinks or for items you don’t need.
2. Increasing your debt level is an extremely bad idea.
Never, ever take on any type of debt without a ton of consideration. Debt is one of the worst things you can do to yourself. If you have to go into debt for any reason, buy the least expensive thing you possibly can, eliminate that debt, then start saving up for a replacement. Never go into debt for something you don’t absolutely need.
It’s absolutely as simple as can be. When you go into debt, you’re essentially agreeing to pay some company substantially more than whatever item you’re considering buying is worth. If you buy a car with a 6% plan over 60 months, you’re going to wind up paying roughly 20% more for that car than the sticker value. If you’re looking at a $10,000 car – guess what? You just lost $2,000 out of impatience. If you buy a bunch of stuff you don’t really need on a 20% APR credit card – say, $1,000 worth – and you don’t pay it off for a year, you’ve just lost somewhere around $200. It’s gone – and you got nothing in return for it except for your impatience.
If you can’t afford something without debt, don’t buy it. Look for a less expensive alternative. Go to Goodwill or to a used car dealership. If you really want a nicer version, start saving now. That way, the interest works for you rather than against you, as the interest accumulates in your savings account rather than accumulating in the pocket of your lender.
3. Believing that “your future self will take care of it” ensures a miserable life.
The best move you can make financially and career-wise at any given moment is the move that gives you the most options tomorrow or a year from now or five years from now. Do not put burdens on your future self or your future will just look like a series of closed doors and unattainable opportunities.
“Buy now and pay later” plans are bad. Putting off big projects? Bad. Putting off opportunities to build connections in your field? Bad. Debt of any kind? Bad.
If you have a choice between sucking it up and dealing with something challenging now or putting it off until later, always suck it up and take it on right now. Live more frugally than you thought possible today so you can afford to move across the country and take that amazing job tomorrow. Stay out of debt today so you can afford to start your own business tomorrow. Go to a convention today so you can get a much better job elsewhere tomorrow.
Whenever you have a choice, make the choice to open doors for your future self, not put additional burdens on your future self.
4. Start retirement savings the first day you possibly can.
Many jobs today offer retirement plans. Many of those retirement plans include employer matching, which means that you can immediately multiply your contributions just by putting money in. Never, ever turn down this opportunity. Sign up and get on board the first day you possibly can.
How much should you contribute? 10% total (your contribution plus your employer) is good. 15% total is better.
What should you invest in? Just ask whoever runs the plan if they have a “target retirement” fund and choose the one with the year that most closely matches the year when you’ll be 70 years old. Put all of your contributions into that. It will suit you very well to start with.
For one, you’ll never miss that money in your paycheck if you never see it to begin with. If you start contributing from day one, your check with the contributions subtracted will be your normal paycheck. For another, starting right now means that you’ll essentially never have to worry about it. So often, when people move through their career, they become paranoid about retirement. What will I do about retirement? Starting from day one means you never ever have to worry about it.
5. If you don’t have any specific long term goals, use your money to eliminate debt.
The first experience that people have with money when they get their first good post-college job is the sensation of receiving a big fat paycheck. It’s usually the biggest paycheck that you’ve received to this point and it’s often very tempting to go buy something silly with it. Go do it. Once.
When you get that second check, though, it’s time to get down to business. Pay your expenses, then take a big fat helping of what’s left over and use it to make a big extra payment on one of your debts – preferably the one with the highest interest rate. Take care of it now, because the longer it sits around, the more of your money winds up in the pocket of a lender (as mentioned under tip #2) and the more restricted you’ll be with your paychecks down the road (as mentioned under tip #3).
An exception to that: the first thing you should do is make sure you have $1,000 set aside in a savings account somewhere as your emergency money. It’ll really save you in a pinch. After that, though, start hammering the debt – hard.
Get rid of your student loans. Get rid of your credit card debt. Get rid of your car loan if you have one. Get rid of any and all debts you accumulated during college. They’re weights around your neck – and the neck of your future self (never, ever forget the third tip, above).
6. If you don’t have any specific long term goals and no debt, keep your extra money in a savings account.
Why in a savings account? When you’re first out of college, you’re likely to jump around a lot. You don’t have kids and you’re likely not married, so it’s a lot easier to make a big shift. You’ll move. You’ll switch jobs. You’ll possibly switch careers.
This kind of action needs flexibility. You don’t want to have your money locked away somewhere where you can’t touch it (which means things like CDs are out). You also don’t want that money in a place where it can easily lose value (so stocks are out, too). A savings account doesn’t return much, but it is secure and it is easy to access money from. It’s perfect.
Keep your money there until you feel roots beginning to take hold. At that point, you’ll be in a much different place and have much different problems to think about. (You’ll be your “future self” mentioned above, and you’ll be incredibly happy that your younger self was sensible enough to keep a lot of doors of opportunity open.)
7. It is unlikely that you’ll stay in your first post-college job – or even your first post-college career path – forever, so plan accordingly
The most valuable things you’ll get out of your first post-college job are relationships and transferable skills. Take advantage of any opportunities that allow you to meet people in your field. Go to conferences and talk to lots of people. Take part in meetings. Get to know as many of your peers as you can – as well as the people that are further along in your carer ladder.
At the same time, focus a lot on your transferable skills. Practice your written communication skills whenever possible by writing reports and such. Practice your public speaking skills by jumping on every chance you can find to present your work or the work of your organization. The more universal skills you have – presentation skills, writing skills, time management skills – the more valuable you’ll be no matter what you wind up doing.
These are the valuable things you’ll get from your first job, not your paycheck. Your paycheck helps pay the bills, helps eliminate whatever debts you have hanging around your neck, and helps you prepare for whatever that next opportunity is.
All of this stuff will come together at once in a few years and that’s when you’ll hit your career and your finances out of the park.
8. Don’t be ashamed to live with your parents for a while, but don’t view it as a long-term solution.
You’ll find lots of different takes on this proposition. Some people will view this move as a sign that someone is failing at their post-college life. Others will look at it as the normal course of events. Some will see it only as a fallback plan.
I see it as an opportunity if your parents are willing. It’s a chance to spend your first professional year destroying your debt and solidifying your professional standing without many of the expenses of everyday independent living. It’s not a fallback plan, but a boost.
Remember, though, that a good boost doesn’t last forever. It merely launches you on your way. Have a plan to get yourself out of the situation the day you move in. Specify a deadline for you to move on and make that clear to your parents so that they can plan accordingly as well. You should not be a leech to them – they’ve already given you so much over the past twenty-odd years that you should be chomping at the bit to give them the peace of mind that comes with having a truly independent and self-sufficient child.
9. Your specific investment choices matter less than the simple fact you’re investing.
So often, people put off investing because they’re afraid of making a mistake and investing in the wrong thing. That, in itself, is a far bigger mistake. You’re far better off investing in a poorly-returning investment than not investing at all.
The first application of this is hinted at in tip #4, above. You’re better off starting the first possible day on your retirement plan. Why? It’s your investing dollars that make the difference when you’re just starting out, not the perfect investment.
Even putting money in a savings account is a form of investment (it’s a stable and highly liquid investment with low returns). Just like elsewhere, you’re far better off starting a savings plan now than you are putting it off because you’re not sure exactly where to put the money. If you don’t know, put it in a savings account. You can always move it later.
Don’t let your uncertainty about the specifics keep you from saving and investing money now. If you don’t know for sure, just go as simply as possible.
10. You have an incredibly long life ahead of you. Use that knowledge to your advantage.
If you’re just starting your first post-college job, it’s likely that you’re in your early 20s or your mid 20s. A person of that age right now will live on average well into their 80s. You will probably be working productively fifty years from now. Fifty years.
Spending two years of your career working at a startup is a blip in the big scheme of things. Taking three years to work for the Peace Corps? Another blip. Taking on risks and adventures like these do not have the same risk for someone who has fifty years of career ahead of them versus someone who is looking at retirement shortly.
Take those risks now when you’re young and single and unencumbered with debts and other obligations. This is what it means to keep your doors open. There’s a long hallway ahead of you with a lot of doors in it. You have plenty of time to look through a lot of those doors, and you should. At the same time, you should be trying to stay out of debt and give your future self skills so that you can see what’s behind as many doors as you can.
After all, you’ve got half a century to explore.
A final tip: almost all advice you get has something of value in it, and you’ll be rewarded for figuring it out.
You’re going to read and hear a lot of advice. You’re going to think that an awful lot of it doesn’t apply to you – and there’s at least a chance that you’re going to think the same thing about this article.
If you feel that way, you’re missing out on an opportunity. Almost every piece of sincere advice has something you can pull out and apply to your life.
If you find yourself discarding advice and advisors just because you can’t quickly see how they fit, you’re missing out on opportunity. Take in that advice. Let it sit in the back of your head for a while. See if you can see those patterns in your own life. You might just find that when a big problem comes along, you already have the answer in hand.