Advice to College Graduates

It is easier to get used to living with more than it is to get used to living on less.

Let us assume for the sake of argument, that while you were living in college, you were able to meet your living expenses on $24,000 or less per year. For this amount of money, you probably were able to live together with some other people, pay for food and utilities, clothes as they arose and be able to do a little bit of travel to visit the family. Let us also assume that you are lucky enough to be offered a job and have a salary of $50,000 to start.  Let us also assume that you have $3,000 in credit card debt.

You may possibly find that $50,000 that you thought was coming to you quickly turns into $40,000 due to various items withheld in your paycheck whether it is insurance or taxes.

My advice is this. Live as if you still only had $24,000 or less to live on and save the rest. If you are eligible for a match in a retirement plan at work, take it. If you have any credit card debt, this would most likely be a good time to pay it off.  If you are eligible for saving in a Roth IRA, there is a good chance that it would make sense to investigate how Roth IRAs work and consider investing the maximum contribution.  Consider placing some of the rest of the money to build up an emergency fund. Ideally this fund should be built up to 3-6 months’ worth of your expenses or in the case of living on $24,000 per year this would be $6,000-12,000.

Fast forward one year. By this time you may have: 1) paid off your credit card debt, 2) built up an emergency fund of at least $6,000, 3) saved $5,000 into a Roth IRA, 4) may have $3,000 or more dollars built into your retirement plan if your employer offers an average 3% match.

If you were to keep this savings up for four years, there is a strong chance that you will have set yourself up for a favorable financial future for a number of reasons:

1)      You will have resisted the temptation to spend what you make or more than you make. This will carry you far in life.

2)      You should have a solid cash reserve built up that not only could be useful for times of financial hardship, but could be used for a major purchase.

3)      You would have $20,000 that you would have saved into a Roth IRA, in one more years’ time (after your 5th year), you will have the opportunity to take up to $10,000 of the growth in that account and put it towards a first time home purchase.

4)      You will have time on your side when it comes to investing for your retirement, because you were diligent in investing early.

Please write regarding any questions you may have.

*Please note that everyone’s situation is different, and that you should consult a financial advisor individually before following any investment recommendations.