Senior Director of Planning

In this Wealth Planning Update:

  • Tempting as it is to start spending that first paycheck, now is the time to build some good financial habits
  • Investing from the start and taking advantage of employer matches can help  build your portfolio
  • Taking on debt for major purchases may be tempting but should be avoided when purchasing depreciating items
  • Creating a plan from the start to build a financial roadmap helps keep you from a reactionary mode down the line

The months of May and June are a time when many of us celebrate the new college graduates in our lives. But after years of academic rigor, our thoughts quickly shift to the practical for these young adults. During this time, the questions in many new graduates’ minds include, “What’s next?” and, “With student loans, monthly living expenses, and the grind of a new job, how do I begin to plan my financial future?” Here are ten tips that we would like to offer new graduates to help guide them towards a financially successful path.

  1. Live below your means
    Living within your means is something you hear often but when it comes to achieving financial security, living below your means is the way to mesh your financial and personal goals. If you can maintain a frugal college student mindset the first two or three years after you get your first job, you may be amazed at how much money you can save and invest. The more that you invest now, the more you’ll benefit from the potential growth of these investments over the long-term. Develop a budget—know what you can afford and what you can’t. Be realistic—it’s important to realize you can’t always have anything and everything you want.

  2. Set money aside for emergencies
    Open a separate bank account for emergency funds. Try to accumulate enough money to cover three to six months of basic living expenses. Although it may not feel like it, it’s actually easier to accumulate this cushion now when you have fewer financial commitments than at any other time in your life. Speaking of emergencies, if your employer offers disability insurance you many want to consider signing up; you are more likely to need disability insurance than life insurance in your early working years.

  3. Start retirement savings with your first paycheck
    Retirement may be the last thing on your mind as you start your first job, but if you don’t take advantage of your company’s savings plan you may be giving up an opportunity for “free” money. Most companies provide 401(k) plans that offer employer matching contributions. At a minimum, you want to capture the full amount that your employer is prepared to match. Starting to save early can help you benefit from the power of compounding where, over time, the return you earn on your investment helps it to grow at an accelerated rate. We suggest saving as much as possible when you leave college, even if that means living with mom and dad or putting off a car purchase. Doing so straight out of college may put your holdings significantly ahead of where you would be if you delayed savings for even 10 years.

  4. Create separate savings accounts for large purchases
    Determine what significant purchases you would like to make and start a separate savings account for those items, whether it is furniture for your apartment or travel costs for all those weddings that occur in the years after graduation. Resist the urge to withdraw money from your investment account to purchase a consumer product—once you have saved funds you should be reviewing them to make sure they are invested appropriately versus withdrawing them.

  5. Keep credit card balances low and pay them off in full each month
    It is easy for debt to get out of hand. Just as saving money allows you to benefit from the power of compounding, even a little credit card debt can grow to a larger amount even faster depending on the interest rate. If you don’t pay off the full balance on your card each month, you may be paying for your shoe purchase or dinners out for months or years to come. Be sure to understand how credit works and how it impacts your credit score.

  6. Borrow prudently
    Take out a loan only for purchases that will likely appreciate over time. Avoid borrowing for items such as clothes or furniture, which lose value before the first payment is made.

  7. Be a smart car shopper
    Before you buy a car, consider issues such as its resale value and the total cost of ownership. Insurance can be especially costly once you drop off your parent’s policy. Carefully consider whether buying a new car that depreciates the moment you drive it off the lot is the right financial move for you. You will often find that a car that is a year or two old with low miles and lots of warranty coverage remaining offers better value than buying a new car.

  8. Reward yourself with one modest purchase
    We recognize that life cannot be about saving alone. Getting that first full-time job is cause for celebration. Treat yourself once—just don’t go overboard.

  9. Use rare “in the money” moments—such as tax refunds, bonuses, and raises as well as holiday gifts—as investment opportunities
    Through the power of compounded interest, systematically applying discretionary income to savings and investments can help you successfully meet your long-term financial goals. Since all investments typically carry some measure of risk, if you are a first-time investor you should educate yourself about the risks associated with different types of investments and think about how you may react when financial markets fluctuate. If you think that short-term market fluctuations may make you want to sell your holdings, you may want to consider structuring an overall portfolio that is less risky. If, in contrast, you think you are able to focus on the long-term and ride out short-term fluctuations you may want to consider investments that offer the potential for higher returns, but which may be riskier.

  10. Consider talking to a financial professional
    These professionals can help you determine both the types of investment that may be right for you as well as a basic plan that can become your financial road map for the next several years.

Our advice can help you to build your financial future in a proactive manner rather than having to react later in life when you may have less time to catch up on your savings or to pay down debt. Your college years required drive and determination—applying those same qualities to your financial future can pay off as well!