The end of the school year is always bittersweet for me. On the one hand, I get to watch several students graduate who I have become close with over the past few years. On the other, my world is much sadder that they are gone. It is also the time when commencement speakers will offer all kinds of advice to upcoming graduates. So consider this my version of a commencement address to my students on personal finance.
My Advice to Graduating Seniors
First, live like a college student. I know that a lot of you will want to go out and buy a new car, wardrobe, take a trip, etc. However, if it isn’t paid for as a gift or something STOP what you are doing now. Don’t do it! I repeat Don’t DO IT!
For the past 4-6 years you have been living a fairly poor lifestyle (at least I hope). You might have racked up some student loan debt, but hopefully you have kept your expenses low. No credit card debt or car payments, etc. You’ve been able to survive on happy hour specials, living at home with your parents or multiple roommates, and eating ramen noodles or some other concoction. You might be tired of it. But trust me KEEP DOING IT FOR AT LEAST A YEAR OR MORE!
Most likely you will be making more money than you ever have before at your first job and you don’t want to blow it on stuff that has been out of reach until you graduated. It is kind of like when you get a large sum of money from a lottery or other windfall. Most people recommend you don’t do anything right away. Just stop, get your financial head in order and then you can inch your way into buying stuff.
Second, pay off your student loans like there is no tomorrow. One of the reasons why you should live like a college student is that because most of you will have student loans. My students will probably have anywhere from 25-40k in debt. Once you get your first job keep your lifestyle simple and send all extra money to those loans and/or other debts.
Student loans are some of the primary reasons that millennials aren’t buying houses. People are waiting to start their lives until the debt is paid off. To get to it sooner pay off your debt as soon as possible. Pay those loans off and then maybe do something else.
Third, begin to save for retirement RIGHT AWAY! I know that this is going to fall on deaf ears, but if one of my students reads this or student who is graduated recently please, please, please start saving for retirement in a 401k, 403b, or Roth IRA. Don’t wait six months, a year, or whatever. As soon as you are eligible SIGN UP for your company’s retirement plan.
You should save at least 15% of your income if you can.
Now some of my students will be like I can’t afford 15%. Well, my answer is you can afford it if you live like a college student. You have been doing just fine for the past few years why should now be any different. And you won’t regret it in the long-run. So NO EXCUSES! This is WAY TOO IMPORTANT!
We have a savings and retirement crisis in this country. Don’t contribute to it by waiting until your 30.
Now if you really can’t afford it because you are wanting to make massive payments on student loans or whatever at least INVEST UP TO THE MATCH of your company.
Most companies my students will be working in will match up to x dollars that they put it. In other words, if you put in 6% then they will match that dollar for dollar up to 6% or whatever. At the very least contribute to the MATCH. If you don’t you are losing free money. DON’T LOSE FREE MONEY.
Besides, as my colleague and fellow professor personal finance blogger over at TEACHER/INVESTOR can tell you that compound interest is a GREAT thing.
However, I do want you to get to that magic number of 15% or more. So if you don’t do it right away then every time you get a raise increase you retirement contributions by 1%. Trust me you won’t miss the extra $50 or so a week.
Fourth, don’t let inflation lifestyle creep in. This is another reason why I want you to live like a college student. One of the things that happens when students get their first jobs in their careers is that they go a little crazy. They buy a new car, get a new place to live, clothes, take a trip, etc. They also go out to eat all the time or get coffee or whatever it is. In other words, you manufacture spending that you didn’t have before. Don’t let lifestyle inflation creep in and crowd out those dollars that could be used for other things.
I want you to have your own place and buy a another car although I think buying used is the way to go, but I don’t want you to do at the expense of other things.
Finally, I want you to be Ron Popeil. Ron Popeil is a famous infomercial guy. And one of the products he sold was this oven where you would put in meat or chicken or whatever and his famous line was to “Set It and Forget It.” Nearly 80% of millennials aren’t in the stock market and investing. To me that is a moral outrage.
It is one of the reasons we have a savings and retirement crisis in America.
I know one of the main reasons they aren’t doing it is because they saw their parents get wiped out in 2007-09. However, if their parents had stayed in the market they would have not only made back their money, but they would have doubled it since then.
The stock market is NOT a casino. It is NOT gambling.
It is a great way to build and sustain wealth. Not necessarily to be rich, but for you to be free to make your own decisions.
In fact, unless you invest in real estate, are a trust fund kid, or somehow get lucky by winning the lottery, the way that you get to financial independence is through investing.
I only wish I knew now what I could’ve known at 22.
If there is an economic downturn and you are contributing to a retirement plan: KEEP CONTRIBUTING! Stocks are on sale. In fact, contribute more. It will pay off in the long-run.
Don’t be scared. Don’t panic. Don’t sell out. Be RON POPEIL! Set your investments, forget them until it is time to retire and continue to contribute to them.
The Bottom Line: I wish all of my graduating seniors the best of luck. I hope you succeed in all of life’s endeavors. And if this advice helps any one of you then it is worth it. Trust me if you do these things and save even more when you turn 40 you will be LOVING the position you are in.