12 Tips for New Graduates

Being located in Fort Collins, near CSU, we see quite a few new graduates who come in to talk about their financial future.  This is so outstanding!  It helps them develop a vision of where they want to go financially (which enables many other goals).  It also puts time on their side in terms of savings.  For example, $5,000 saved around graduation has about 45 years to grown until retirement.  Assuming a 4.5% growth rate, that nest egg will be worth about $36,000.  Seem like small change?  How about saving $5,000 a year during that period?  Then you end up with a half-million dollars at retirement!

Anyway, these meetings with graduates have established twelve tips that seem to be pretty much applicable to everyone.  We’ll talk about the first six this month and the other six next month.

  1. Establish Goals. In addition to retirement, there will be lots of things that you will want to do in your life that will require some saving. These things might include a new car, a boat or a down payment on your starter home.  All of these things take work and will require that you put money away early and often to obtain them.  Having a large down payment on a house will dramatically reduce your payments and can even increase what your able to save for your other goals.  Buying a house with little to nothing down is going to increase your monthly payments drastically and tighten your budget along the way.
  1. Know the difference between gross and net pay. Keep in mind that the job offer you receive is not actually the amount that you will be bringing home. The amount you see on paper is your gross amount and does not reflect your after-tax or net pay.  This is important because some people make the mistake of taking on a living situation under the assumption they are going to be making more than they really are.  For example, if you receive an offer that includes a $50,000 salary in the state of Colorado for a single tax payer with no dependents, that actually translates to roughly $36,244 after taxes.  That equates to a difference of nearly $14,000.  Simply put, make sure you are taking taxes and other withholding factors into account when you are planning your budget.
  1. Make a budget and stick to it. Budgeting can seem hard, but after you get started, it’s actually pretty easy. The 50/30/20 rule is a commonly accepted budgeting practice in which you base your spending off of the amount of money that you bring home (net pay).  You spend 50% of your paycheck on necessities, 30% on discretionary items such as clothes, entertainment and dining out and 20% on savings.  If one-fifth of your paycheck sounds like a lot to be kissing goodbye every two weeks, make sure you are taking advantage of any work-sponsored plans.  Many employers offer matches on 401(k) plans and other financial benefits.  If your employer offers a 5% match, take advantage of it.  Then you only have to put away 15% towards savings and your employer will take care of the rest!  The more you can capitalize on employer-sponsored benefits, the more you’ll have for other goals.  If you are especially savvy, consider the principles of billionaire Sir John Templeton.  John started out poor in the early stages of his life, but quickly changed that through hard work and a lot of dedication.  He regularly put in 60 hours a week and put away 50% of his pay towards savings.  Now this is way too aggressive for most of us, but we can apply variations of this principle based on the circumstances in our lives.  For example, if you receive a bonus at work, or if you have some kind of financial gain from a real estate endeavor, consider putting at least 50% of it into your savings.  This principle will have a massive impact on your savings if you apply it whenever you can. 
  1. Invest. Investing is scary, especially if it’s a completely new concept to you. Risk is an inherent part of investing that never really goes away.  However, if you are just lumping all of your money into a savings account or into government bonds, over time inflation is going to eat away at everything you’ve worked so hard for.  Growing your money is the only real way to mitigate inflation and to make sure that you’re financially stable 40 years down the road when it’s finally time to retire. It doesn’t have to be something you do alone; there are many professionals out there whose only job is to ensure your financial success. 
  1. Start an Emergency Fund. I know it seems like pulling from your paycheck never ends, but I promise you it pays off down the road. Start an emergency fund as soon as possible to account for unforeseen events.  This could be anything from your car breaking down to being laid off from work.  When surprises happen, you don’t want to have to hit up your savings to pay for random big-ticket events.  Having an emergency fund provides peace of mind knowing that if anything does go wrong, you can handle it without using the savings that you’ve worked so hard to put away.  Life is full of surprises, so make sure you’re prepared for them.
  1. Reduce your debt. Before you’re ready to make any major purchases, like a new car or buying a home, you need to get rid of any significant debt that you already have. This way you aren’t digging yourself a hole that you can’t get out of.  If you are paying back things like student loans or credit card bills, getting rid of them should be your primary objective coming out of school.  Once your debt decreases you’ll notice your credit score will begin to improve, which provides you with a huge benefit when you do decide to start making some major purchases.  A healthy credit score can significantly affect the interest rate applied to your purchase.  Over the life of the loan, this can save you thousands of dollars which would have been wasted paying off inflated interest.  Keep in mind that you don’t have to go crazy trying to pay things off.  A good strategy to use is what’s called a debt waterfall.  To implement this strategy you will begin paying things off one at a time.  Pick your debt with the highest interest rate and increase your payments towards that while making minimum payments towards all of your other debt obligations.  If the minimum payment is $50, make payments of $100.  Obviously, what you are able to pay will vary from person to person, but this principle can be applied by anyone.  Keep this up until eventually all of your unwanted debt is gone.  This won’t take as long as you might think if you stick to it.

Next month, we’ll cover the remaining tips for recent grads.  We know a lot of this is new to many of you.   We’d be happy to help you apply these ideas to your personal situation (or talk about any other financial matters) in a no-charge, no-obligation initial meeting.  Just visit our website or give us a call at 970.419.8212 to learn more.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.