Getting Ready to Graduate? Post-College Financial Advice
When I think of what I would share with a recent college grad, saving comes first to my mind. When a person is young they have a distinct advantage – time.
In the financial world, we use something called the “Rule of 72” to estimate what someone’s investing account balance could look like after a period of time, with a certain rate of return. This quick and dirty financial formula first requires a conservative guess for the average rate of return.
For example, let’s assume an 8% average return over the years of investing. So the number 72 divided by 8 (for the 8% average yearly return) equals 9. According to the Rule of 72, a person’s money will double approximately every 9 years (keep in mind, this estimate does not take into account any fees, taxes, down years, or other external factors associated with the investment account).
In this example, if a young person starts saving at an early age, say 22, they could have five doubling periods to age 67 for that initial money deposited into an IRA or company retirement plan (22 +9 +9 +9 +9 +9 = 67). If another recent grad of the same age waited to start saving, under this example, they could end up with only 4 doubling periods and half the amount of money at age 67!
A young college graduate is likely balancing student loan payments, possibly a car payment and may even be thinking about purchasing a home. So it takes discipline to prioritize where the income will best be used – and some restraint or delayed gratification. Our culture screams at us through advertising that we need to drive a certain car or live in a certain place. But in this instance, I believe it’s best to start saving early while time is still on your side.
One other area of consideration is budget. We encourage all our clients to create a monthly budget and stick to it. The idea of which is simple: spend less money than you make. Unfortunately credit cards make it easy to forget this simple idea. It can be tempting to “buy now and pay later,” so more discipline, maturity and restraint are required.
We also recommend having an emergency account for those unforeseen bills that tend to surprise us. This is one of the keys to not falling into the credit card trap. When an emergency pops up, (by definition emergencies tend not to let us know they’re coming ahead of time) a savings account can save the day.
The real world starts to settle in quickly after the graduation congratulations fade. It’s important to start your financial life off right as your new career takes off. One day you’ll thank yourself.
Thank you for your time and please pass this along to the recent college graduates and other young adults in your life.
Securities and Advisory Services offered through LPL Financial. Member FINRA/SIPC.