Advice For Graduates
May 23, 2008 – 6:20 amWith high school and college graduations drawing near, I’ve been thinking about what advice I would give to the newly minted graduates. This also ties in with one of my long term goals to write a finance book for my children. I don’t have any children yet, so I’ve got a few years before they arrive and can read. 
The more I think through this topic though, the more I realize that these recommendations apply to everyone. Some are definitely more of a personal preference or decision, while others fall into the “common sense but rarely done” category.
Start 401k contributions immediately, and aim for a high initial contribution
This is probably the best advice I can offer and the advice least likely to be implemented. I know in a lot of ways school seems like a four of five year stretch of deprivation. Like going off a strict diet, graduates are itching to binge on leisure activities and spending sprees. Peer pressure at this age also exists, and regardless of whether you just graduated from community college or just finished an MBA or J.D. there is pressure to look successful as soon as you start your career.
If you do take this advice, however, you will never ever in your entire 40+ year career miss the money you are investing automatically in your 401k. Going back to the diet analogy, if you’ve never had high calorie/high fat foods, you’d never know what you are missing and eating healthy would be the only choice!
I realize starting salaries don’t usually make this process easy, but if you can figure out a way to live on a budget and start out by investing 10% or more of your income in your 401k right from the start you will in great shape.
By some miracle of God I actually did this when I got my first job, and I barely even consider my 401k contributions part of my “savings” these days. I’ve never seen the money, touched it, or been enticed to spend any of it. It goes where it should without any thought from me.
Avoid buying a new car or an expensive car
If you don’t already own a car, buy one that is reasonably priced and preferably used. The easiest way to break your budget and 401k contribution plans is to have a $400-$800 monthly car payment.
If you have a car, keep it! The least expensive car to drive is the one you already have. Fix it, tune it up, and drive it until you’ve saved enough cash to purchase a replacement.
Avoid Luxury Goods
There’s nothing wrong with enjoying the fruits of your labor, but I would recommend caution when purchasing goods. This is especially true for big ticket items.
Everyone grows up in different circumstances, but it’s easy to get used to a luxurious lifestyle. This makes it difficult to ever scale back, and you can quickly find yourself in a problem.
Consider this scenario: you graduate from college, and you buy yourself a new BMW (or even a slightly used BMW for $40,000). You can afford the payments, and you’ve dreamed of owning this car for years. I’m not one for squashing your dreams, but let’s just look at this situation.
You buy the car, and of course you can’t pay cash. So you finance the car putting $4000 down. This is your entire signing bonus, which you thought was a lot of money considering you’re currently driving a $3000 car. But on the BMW it’s a 10% down payment, and you get financing at 7% for 6 years to lower your monthly payments. You’re monthly payment comes to $613. On a $40,000 income, which I think is a great income, you’ll net $2800/month. Congratulations, your car is costing you 21% of your net income! You’ll also end up paying $48,200 for a car that in six years will be worth a fraction of that price.
Now let’s roll the scenario forward:
- it’s hard to drive a BMW and live in an inexpensive apartment, so soon it becomes time to buy a house
- there aren’t a lot of BMW’s in the starter-home neighborhood you should be shopping in, so why not scale it up a bit and look for a home the size of your parents? After all, it only took them a dozen years or more in order to afford a house that size. And don’t forget that interest rates are low an housing prices always go up! (can you feel the sarcasm?)
- you tend to attract friends with similar interests, and you end up with friends that all spend quite a bit of their income on high-priced entertainment
- it’s difficult to trade down to even a brand new Honda or Toyota after driving a BMW for a few years (I assume), so down-grading will be painful or near impossible.
- you meet your future wife or husband, she/he loves the car, and wants one of her/his own. Or, at a minimum, you both share the car and your new spouse is used to traveling in style when the two of you are together. It’s hard enough convincing yourself to downgrade…good luck convincing your spouse to agree too!
- Maintenance on an imported car can also be pricey, and even BMW’s need maintenance occasionally.
All thing considered it will be easier to control your spending if you keep to reasonable limits in mind. And this doesn’t mean you have to sacrifice on quality and buy junk-level goods. I’m simply recommending that you stay near the middle of the range for big purchases, not the top 25% or bottom 25%.
If you love a car or whatever, and can pay cash, go ahead an buy it. I wouldn’t recommend this personally, but then again I’d rather have two brand new Honda Civics than I would a new Hummer, Land Rover, or Lexus. But that’s just me.
Create A Budget
Duh! Young or old, rich or poor, creating and using a budget will benefit you in dozens of ways. This may sound a little harsh, but if you don’t have the disciple or time to budget every month (and it takes probably 15 minutes/month after the first month), you don’t deserve to succeed and improve your financial well being.
Consolidate your student loans
I don’t know if this process has changed much in the last three years, but a few years ago when I graduated consolidating rolled my variable rate loans into a single fixed rate loan. As of this posting interest rates are still very low, and if the loan consolidation process hasn’t changed this could lower your risk and monthly payment by quite a bit.
Learn to Invest
I spent quite bit of time reading books on how to invest and on personal finances in general when I graduated, and it was well worth the time and effort. Some people don’t like to read or aren’t interested in this topic, but how hard is it to listen to one audio book a year on your way to work?
I also made a ton of mistakes in this area, and I’m still making some I’m sure. Most people struggle when they try new things, and this is true of investing as well.
Learning to invest at a young age ensures that you know a bit more about what to do when you have more to invest. Learning about your investing style, how much time you want to put in, and your risk tolerances is very important. The earlier you start down this path the better.
Give
I’m a Christian, and the Bible provides clear guidelines and benefits of tithing (giving of the first 10% of your gross pay). I stumbled with this when I finished my undergraduate degree, and it took me several more years before becoming faithful in this area. My experience has been that if you start giving when you make a little it will continue when you make quite a bit. Some might argue that your giving and faithfulness to God’s word allowed you to prosper and helped you earn more in the first place! I would think that it’s much easier to give $3,000 of a $30,000 income than it is to give $15,000 when you earn $150,000. It may seem like with such a large income giving $15,000 would be easier, but I don’t think it works that way. It’s easier to think of a lot more things to do with $15,000 than $3,000, and it’s harder writing a bigger check.
I also recommend giving out of each paycheck (as does the Bible in my interpretation), rather than writing one big check at the end of the year. I don’t have the discipline to do that personally, at least not yet.
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