Congratulations to all recent college graduates. You face the prospect of a wonderful future and will have the opportunity to set and achieve many goals throughout your lifetime.
During your college years you studied hard and lived more frugally than if you were working. You will reap the benefits of those sacrifices. Statistically it has been shown that as a group, college graduates have higher lifetime earnings.
Just as you will benefit from the sacrifices you made to attend and complete college, you will also benefit from developing prudent financial habits early in life and here are a few suggestions.
Congratulations if you landed the job of your dreams. If you have not yet found a job, make your job search a full-time endeavor. Searching for a job can often be more difficult than having one, but do not sell yourself short. Focus on finding a job that you can get excited about and will provide good experience, rather than solely on the salary. If you love your job and are getting relevant experience, you will reap the benefits in the future. If your passion is in a field that does not have good job prospects (or jobs that do not pay a livable wage), consider making your passion a lifelong avocation while pursing a better paying, but still exciting vocation.
Strive to pay off your student loans sooner than required. Once they are paid off continue to put that same amount of money into savings and investments
Live below your means. Be frugal with your spending. You really do not need a fancy TV, a new car, or an expensive place to live. Develop sensible spending habits early in life, and you will be significantly ahead of your peers in building real wealth.
Establishing credit is sensible. Abusing credit is not. You should open a credit card account to establish credit, but make a point of using it very little. And always pay off your balance in full each month. Credit card interest is about the most expensive debt you can find. If you miss credit card payments, not only will it cost you interest and penalties, it will damage your credit rating and make it more difficult and expensive to obtain a mortgage if you wish to buy a home in the future.
Participate in your employer’s retirement savings plan as soon as possible. Frequently employers will match a portion of your contribution, and that is about as close as you will get to “free money”. Your contribution may be tax deductible, which will reduce your taxes. Even if you begin with a nominal amount, make a point of increasing your contribution each time you receive a raise. Don’t put it off. Due to the power of compounding it is more important to invest when you are young. If you invest for ten years between the ages of 25 and 35 and earn 8%, you will have as much money at age 65 as someone who begins at age 35 and invests for thirty years!
Your real long term risk is not short term market fluctuations, but rather the hidden erosion of purchasing power caused by inflation. This risk is particularly important since you will likely live longer than your parents and grandparents and the longer you live the more damage inflation causes. Twenty years ago when you were born, the cost of a US first class postage stamp was 29 cents. Forty years ago it was 10 cents. Today it is 49 cents. The cost of most other goods has gone up over your lifetime as well. Imagine what things will cost in 40 years or so when you are close to retirement. You need an investing plan that will offset rising prices and historically equities (stocks) have been the best method for doing that. Since you will be investing for the rest of your life, you can afford to ride out stock market fluctuations. But don’t bet the farm on one stock. Build a diversified portfolio of individual stocks or low cost no-load mutual funds.
Go Forth and Conquer the World
Good luck in your future endeavors. Your unbridled enthusiasm and dreams will serve you well. If you develop prudent financial habits and skills early in life it will be very helpful in achieving those dreams.