Dear College Graduates,
This will not be like other advice columns. I won’t condescend, nag, or remind you about irritating millennial or Gen Z stereotypes that you’ve been working to overcome. My goal in this three part series is just to give you some practical tips to start out on the right foot as you enter the workforce. According to a recent study, only around 28% of college graduates say they feel confident about investing. Since the only way to build wealth is to save and invest more than you spend, talking about investing seems like a logical place to start.
Right now, you might feel saddled with student loan debt. You might be working a minimum wage job that doesn’t utilize your degree. You might be nervous about your future. But take heart. You have something that most of my clients tell me they wish they had: time. You have a good four or five decades ahead of you before retirement. Whether you think about it or not, it will be here in a heartbeat.
We’ll talk about retirement in a minute, but before you get to contributing for the long term, I encourage you to save for the short term. Tuck aside 3-6 months’ worth of your expenses into a liquid savings account. We often call this “freedom” money. This gives you the freedom not to have a complete meltdown when your car dies, when you break your leg on a high deductible health plan or when your friend asks you to be in her wedding party and insists you buy the matching $300 bridesmaid dress. It also gives you the freedom to quit a terrible job, start a business you’re passionate about, change careers or leave a dishonest partner.
In life you will be (and probably already have been) faced with these tough situations that so often require money to navigate successfully. There’s a great quote from Jonathan Clements of the Wall Street Journal that reminds us why this important in the first place: “The reason to accumulate money is so you don’t have to worry about money. It’s sort of like health. It’s only when you get sick that you realize how great it is to feel healthy.”
After you’ve secured your “freedom” money, start thinking longer term. Look into your workplace retirement plan and begin investing as soon as you are eligible. Take advantage of that benefit mentioned earlier: time. Once missed, you can never get back the lost employer match, the tax deduction or the tax-deferred growth. Don’t have a retirement plan through work? Start an IRA.
Some of you might have heard about the Rule of 72. If you divide the growth rate of your investment into 72, you get the number of years it takes for your money to double (or, prices to double if you are using an inflation rate). At 7% growth, $1 doubles about every 10 years; so in 40 years it is worth $15. Now imagine that we’re talking about saving $100/month–$3.28/day in your 401k plan. You would have a little over $239,500 in 40 years, assuming a 7% return.
Things might be tight for you right now, as they are for many straight out of college. But please don’t let that be a reason to put off getting started. If you waited just 1 year using the same example above, you would have $16,700 less saved in the same time frame. That means you cost your future-self $46/day to procrastinate getting started, because you wanted to save a little over $3/day right now. Come on. You can’t even buy a coffee for that anymore. And that’s just your money and market performance. If you factor in your company’s 401k match, the numbers are double. If you wait another 10 years to get started, you will need to invest $211/month to have the same amount that $100/month today purchases.
Pay yourself first is a common phrase. I think we need to flip it and say, “Don’t steal from yourself,” because that’s what you’re doing if you don’t take advantage of these opportunities now. Get into the saving habit early and automate it as much as possible with direct deposits from your paycheck or bank account.
You might be thinking, “But I have a ton of student loan debt that’s going to start accruing interest very soon; shouldn’t I stay focused on paying that off instead? I only have so many dollars!” We’ll talk about debt management in next week’s post.
PS – Congratulations.