10 Financial Tips For New Grads
Recently, I’ve been helping a family member navigate the process of graduating from college. More specifically, we’ve been talking about his options as he interviews for jobs and decides what he wants to do and where he wants to live. Since I’m about 10 years past this point in life, I like to think that I can bring perspective to this process. I’m far enough along to realize how important those decisions are, but I’m not so old that I’m out of touch with what it’s like to be 22. Since I’ve been talking about many of these decisions recently with my relative, here are 10 financial/lifestyle tips for recent grads and 20-somethings.
1) Get Three Offers, and Pick The Best
When you’re making any major purchasing decision, it’s always a good idea to get three bids and pick the best one. Why wouldn’t you do this with your first job decision? This may be the only time in your life when you can collect job offers and pick from such a menu, so take advantage of it! Take advantage of on-campus interviewing and Linked-In networking to secure at least three good offers in your selected field.
2) Optimize Your Income
Now look at those three offers and optimize your decision based on first year’s compensation and cost of living. Your starting salary and bonus potential is critically important because it is the starting point from which you will get salary increases and from which you will negotiate when you leave this first job (you probably will). Don’t get too caught up in the income growth potential if employers keep bringing it up because those numbers are often inflated and are not guaranteed. If you have offers in different cities/towns, do some web research using craigslist and apartments.com to develop an idea of the cost of living in each location. Don’t forget to consider other costs like parking for your car (if you even have a car).
3) Get A Room Mate
I repeat, get a room mate! Now is not the time to go solo with your living situation, even if you have been living alone in college. You’ll likely be in a new location, so it’s great to have someone to help you learn the city, meet new people, share expenses, and share in the acquisition of minimal furnishings. I’ve actually never lived alone – I always had room mates, and I’m still close friends with all of them. In most places besides the most expensive cities, you can find shared housing for $400 or $500 a month even if you don’t know someone to room with. This should be your budget price point. Girlfriends count as room mates, but make sure that the relationship is stable and that you won’t be living alone and paying the full rent if the relationship goes south. I would stay in a room mate situation for as long as possible, and please: do not buy a house before 30! Your money is way too valuable in your 20’s to do this (see #7).
4) Pay Off Your Student Loans Fast
If you have loans coming out of college, this is your most urgent financial priority. Make sure that you structure your living expenses to leave at least $5,000 to $10,000 each year for loan repayments. Hopefully you can commit more money to paying off your loans, but maximize your loan payments for your situation. Start by paying off the loans with the highest interest rates first (e.g, private loans). It should go without saying, but pay off any credit card debt that you may have from college; this is even more of a priority than the student loans because the interest rates are likely higher.
5) Don’t Miss Out on the Company 401k Match
While paying off your loans is critical, don’t forget to contribute enough money to your company’s 401k plan to make sure you get the maximum company match. Some companies will match as much as 6% of your base salary dollar-for-dollar. This means that if you put 6% of your salary into the 401k plan, only then will they also put 6% of their money in the same plan. Make sure you get this match; it is basically free additional compensation.
6) Keep Your Car
Now is NOT the time to buy a new car. Keep driving the car you had in college, and spend the money needed on maintenance to make sure that it is running well and is reliable. Resist the temptation to sign on for a new car loan with the income from your new job. The money is much better spent on paying off debt or investing. If you don’t have a car and need one, or your car is really dead (and I mean really dead – like a blown engine, not “needs $1,000 in work” dead), then look for a good used car on craigslist. You should be able to get a solid compact car for under $5,000 that has less than 100,000 miles on it. If you live in a walkable city, consider whether you even need a car in the first place. It may make sense to rent a car or use peer-to-peer car sharing program like Relay Rides when you need to leave the city.
7) Max Out Your 401(k), Start a HSA, and an IRA
While this tip may not be possible in your first year after graduating, you should keep this step in mind after you pay off any debts and you start to accumulate surplus money. Once you have a solid $5,000 constantly in your checking account to cover emergencies, any surplus income should generally be funnelled into your company’s 401k plan up to the max of $17,500. This will probably cover you for at least a few years in your first job, but once you eclipse this point you have a few options for saving money pre-tax.
If you have a high-deductible health insurance plan (you likely will), you can start a Health Savings Account (HSA). Your employer may even start one for you; but if not, you can do so at Optum Health Bank. An HSA, like a 401(k), allows you to contribute money pre-tax from your paycheck. This money can then be spent tax-free on any medical expenses. Once you have enough capital in your account, you can then start to invest it in mutual funds. Each year you can contribute $3,350 to your HSA, and that cap generally increases each year.
If you’ve maxed both of these options out, you can also start your own IRA at a brokerage firm like Vanguard. This would allow you to defer another $5,500 to invest in mutual funds pre-tax. All together, you have the potential to save about $26,000 pre-tax. The beauty of this is that you can dramatically lower the amount of tax you pay by making these compensation deferrals. Additionally, saving at such a young age is much more valuable than saving when you are older due to the exponential growth of compounding interest. In other words, you should work your ass off and live frugally to save in your 20’s so you can have an easy life in your 40’s, 50’s and 60’s!
8) Practice Safe Sex
OK, this one might seem out of place here in a list of financial advice, but it’s not! Besides the need to protect yourself from STDs, which are not fun and can also be extremely costly, you need to protect yourself from the financial risk of early parenthood. Regardless of your gender, having a child in your 20’s results in major financial headwinds with regards to getting out of debt, building investments, and setting yourself up for success. Having a child is a major life decision, not to mention a financial decision, so don’t leave it up to chance. Practice safe sex EVERY time.
9) Learn to Cook
If you don’t know how to cook, now is the time to learn. Figure out what you like to eat, and learn at least 7 recipes that you can make using food you purchase at the local grocery store. If you know at least 7 recipes, you can rotate these each week and stay relatively satisfied in your diet. This is also a good place to mention that you should pack your lunch for work. There is a broad literature on the interwebs about the financial benefits of packing you lunch, so I won’t go into it here. Also, set a weekly grocery and “going out” budget. Don’t set the grocery budget too low, because by splurging on some items at the grocery store (like steaks or nice cuts of fish), you tame the temptation to eat out too much. I estimate that a grocery budget of $80 is more than enough for one person in most parts of the country, and a “going out budget” of $30 can pay for too many beers at the local pub. Cooking at home can help you stay in good shape both physically and financially.
10) Apply Yourself and Get Promotions/Job Offers
Let’s face it, getting ahead financially is not going to be easy if you stagnate in your entry-level position, so it is critical that you apply yourself in your first job or jobs. You can apply yourself both internally (to get promoted), and externally (to get hired to a better job by a different company). Doing a good job is the bare minimum here. You must also network and make friends with people in your own company (so you can learn about other jobs at your company and have a good reputation) and with people in your industry at other companies. It is never too early to join the professional association for your profession in your city (hint: look for it on LinkedIn). If you do this, you will be miles ahead of your peers!
Congratulations to all 2015 graduates! I wish you much success as you embark on your adult lives, and I hope you follow at least some of the advice above. Do you have any additional financial advice to give this year’s graduating class? Leave it in the comments below.