Financial Tips for Recent College GradsThursday, June 9th, 2011 by Cass Chappell, CFP®
Fox 5 Atlanta asked us for some tips that parents could give their recent college graduate children about finance, spending, and saving (see the clip here). Here are my top five, though there are certainly many others:
Contribute at least as much as the employer match to your 401(k)
This is a “no brainer.” The employer match is free money, though you must contribute your own money to receive it. A typical employer match might be 3 or 4% of salary. Given that these are pre-tax contributions, contributing to your 401(k) will not reduce your take-home pay by as much as you might think. By all means, if you can put more than that towards your 401(k), do it! Just be sure that, at a bare minimum, you are contributing up to what your employer will match.
Most retirement plans should be thought of as long term investments. With a few exceptions, you can’t easily access the money in a retirement plan until you are 60, so take advantage of the fact that you have a long-term investment horizon by investing in equities and other asset classes that may involve a bit more risk than others. Over 30 year time frames, investments in equities (stocks) have outperformed investments in fixed income (bonds). Past performance is no guarantee of future results, but I like your chances of success by staying aggressive when you are young.
Don’t stop – EVER
Recessions and market downturns are a fact of life. Between now and when you retire you can expect to experience a few more of them. If you are contributing on a systematic basis (monthly or bi-weekly through your paycheck), then a market downturn can be looked at as an opportunity. Many employees stopped contributing to their 401(k) in 2008 and 2009 because of the financial crisis—the worst time to stop contributing. When the market dips, and you are contributing consistent amounts of money, you will be accumulating more of that particular investment since it is now less expensive. When the market turns around, you will be greatly rewarded for having stuck with it. Many people who continued to invest right through the crisis have been pleasantly surprised when they opened their most recent retirement plan statements.
Don’t buy a townhouse or condo just because you can afford to
Atlanta has an abundance of condos and townhouses for sale right now. Many of these properties are for sale by people in their late 20’s or early 30’s who bought them right out of college. The thinking was “why pay rent when I can build equity in real estate?” As these people got older and got married or had children, many wanted to move into a house. When the housing bubble burst, many of these townhouses and condos couldn’t be sold for what the seller paid for them.
Remember, it costs money to both acquire and sell a piece of property. If you are only going to live in the place for a few years, is it really likely that the property will appreciate enough to offset the acquisition and disposition costs? Instead of buying a property like this, rent within your means for awhile. Build up a reserve of money so that when you are ready to move into a house you can make a sizable down payment and therefore borrow less.
Force yourself to save
The 401(k) is a great tool. But it is money for retirement. What about saving money to buy a car? Or a house? There are several online brokers who charge very low fees to open and maintain separate savings accounts. Even having them draft $25 per month from your checking account can make a difference. My experience has been that people are much more successful saving and investing money when it is automatically transferred and before you have a chance to consider it spending money.