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.