When my nephew Michael walked across the graduation stage at Wake Forest University last week to pick up his bachelor of science diploma, I wasn’t worried about his financial future.
Ever since he was a teenager he has always saved and invested the money earned from a potluck of summer jobs. (I put that down to good parenting skills and the financial lessons modeled by my sister and her husband.)
But not every recent college graduate is as knowledgeable about personal finances.
So, inspired by Mike’s Wake Forest ceremony, I couldn’t resist jotting down 11 pieces of financial wisdom that I would’ve imparted if I’d been asked to be the commencement speaker.
11 Personal Finance Tips for College Grads
1. Pick up a book or two on money basics. A couple that I like, written specifically for young adults, are Generation Earn: The Young Professional’s Guide to Spending, Investing and Giving Back, by U.S. News & World Report senior editor Kimberly Palmer and the bestselling Get a Financial Life: Personal Finance In Your 20s and 30s by Beth Kobliner, a noted personal finance commentator and former colleague of mine at Money magazine.
2. Pencil out a budget. After working for a few months and getting used to the amount of take-home pay (after taxes) you’re earning, figure out how much money you can afford to spend each month.
Mapping out your budget is a great way to help you quickly uncover whether you’re on the rocky road to spending more than you make — as I was for a while after college.
I’m not ashamed to tell you that it was scary and stomach-turning to get phone calls from credit card companies. To set things straight, I borrowed money from my older brother to erase my credit-card debt (I repaid him over time, without interest) and began using my cards only when I knew I could pay them in full each month.
After that experience, I vowed never to let anything like it happen again.
To begin budgeting, first add up the essentials, like your rent, utilities, groceries, transportation, student loans and a car loan. That’ll let you know how much is left over for other spending and saving.
Try not to eat out at restaurants too much, take taxis or spend frivolously on clothes. You’ll probably need to jump-start your wardrobe for work, but there are plenty of ways to do so frugally. Don’t forget to check out secondhand stores for lightly used clothing buys — I found a terrific black Armani suit in one for a song not that long ago. (Some smart money habits stay with you.)
3. Move in with your parents to keep housing costs down. This presumes they’re cool with the idea and won’t charge you rent. You’ll then be able to devote the money you save on housing to cutting your debt and increasing your savings.
I moved in with my mom and dad after college and was enormously grateful they let me stay rent-free; to return the favor, I helped out with the cooking and ran errands.
Not having rent payments let me squirrel away money, start an emergency fund and have enough cash for the one-month security deposit necessary for my first rental, a room in a group house with three other women in Washington, D.C.
4. Steer clear of debt. As my eight nephews and nieces know, this is one of my favorite mantras: “Debt is a dream killer.”
If you’re not saddled by debt payments, you’ll be more nimble and able to pursue a wider array of career opportunities.
Debt can stop you from taking a job you might love because the salary won’t be high enough to meet your monthly obligations.
It can even shut the door on a job offer altogether, because an increasing number of employers are checking prospective employees’ credit reports as part of their due diligence.
I admit this anti-debt advice will be tough for many new grads to follow. A recent Fidelity Investments study found that a stunning 70 percent of the class of 2013 is graduating with an average debt of $35,200.
And 42 percent of Millennials polled say their debt is “overwhelming,” according to a new Wells Fargo Retirement report, twice the rate of boomers who were surveyed.
5. Reduce your debt load as quickly as possible. If you have hefty college loans, “reframe the way you think about your debt,” says Ken Ilgunas, author of Walden on Wheels: On the Open Road from Debt to Freedom. “Don’t think of your debt as a monthly bill, think of it as a sworn enemy. You need to hate your debt,” he adds.
Ilgunas, 29, speaks from experience. He managed to pay off $18,000 of his $35,000 student loan debt in one year.
But if you can’t match Ilguna’s fierce resolve, force yourself to pinch, pinch and pinch some more. Lowering your spending will raise the amount available to pay off your debt.
Adding an extra $25 to your monthly repayments can shorten the life of your student loan and save you interest. Making the payments through automatic debits from your bank account can reduce the interest rate, too, according to student-loan servicer Sallie Mae.
6. Top priority: an emergency fund. The rule of thumb from financial advisers is to try to set aside the equivalent of three to six months worth of living expenses. (Personally, I prefer a year, but that can take time to build.) Make this a personal goal.
A money market mutual fund or a bank savings account are smart places for your rainy day fund.
7. Start investing. No, it’s not too soon. In fact, one of the great advantages you have over people your parents’ and grandparents’ age is that you have many, many years ahead of you, which means more time for your money to grow. And, historically, buying stocks or mutual funds is the best way to do this.
The National Endowment for Financial Education’s website, Smartaboutmoney.org, offers free guides explaining the basics of stocks, bonds and mutual funds. You can also learn investing fundamentals by taking a course at a community college or signing up for a local seminar sponsored by a group like the American Association of Individual Investors, which doesn’t sell financial products.
8. Take advantage of your employer’s 401(k) or similar retirement plan. Workers under age 50 can contribute up to $17,500 to these programs in 2013. Your contributions, deducted from your paycheck automatically, are tax-deductible and your money grows tax-deferred until you take it out, ideally in retirement.
If possible, invest enough in your 401(k) to qualify for the full match (the amount your employer puts in as a result of how much you contribute).
Most employers require workers to save between 4 and 6 percent of pay to get the maximum match. Whatever the match, try to take your company up on it. Why refuse free money?
You might be leery to commit to a 401(k), worrying about tying the money up and thinking that you could invest outside the plan in whatever you want.
But trust me: the automatic feature of a 401(k) trumps those concerns. You’ll save for the future without having to think about it — and the penalties for early withdrawals will help keep you from dipping into the money. One day you’ll thank me.
9. Which reminds me: Don’t raid your 401(k). I screwed this one up. When I switched jobs at age 30, I cashed out my first 401(k). Imagining what that money might be worth today, 23 years later, makes my heart sink.
10. And don’t skip health insurance either. When you’re in your 20s, you think you’ll never get sick or injured. But sudden illnesses do strike and accidents do happen. Insurance will help you pay the medical bills.
Under the Affordable Care Act (also known as Obamacare), you can be insured as a dependent on your parent’s health insurance plan if you’re under 26. The exception: If you can get health insurance through your own job.
If you can’t piggyback onto your parent’s plan and you don’t have a job with health insurance, you might need to buy a short-term policy. For advice on how to do it, take a look at my Next Avenue article, “What to Do About Health Insurance When You’re Self-Employed.”
Starting in January 2014, if your employer doesn’t provide health insurance, you’ll be able to buy it through one of the new health insurance marketplaces.
11. Finally, splurge a bit on life experiences. Sometimes, spending for fun stuff pays dividends. (And as my Irish father always said about money, “You can’t take it with you.”)
The summer I graduated from college I spent $1,500 I’d saved from summer jobs to go on my first trip to Europe, with my older brother. That experience has paid me back with decades of storytelling and memories too rich to put a dollar figure on.
For three weeks, we slept on trains and in youth hostels, lugging our knapsacks from town to town and country to country. Wow, what a journey!
Now that I think of it, I hope my nephew Michael uses the graduation check my husband and I gave him for a travel fund. Then, after he comes back from someplace great, he can start following my other tips.