When I graduated college (over 10 years ago – oy!), I had about $10k to my name – $8k of which went into buying my first car (for cash, used.) While I was very fortunate to not have any debt, I also moved far away from home to one of the most expensive regions to live in the world. Over the last 10 years, I have increased my personal networth to nearly $400k. While my path requires a significant amount of privilege, I’ve learned a lot about money along the way that anyone can use – whether you’re in debt or out of debt. Here are 10 Trips for New Grads to kickstart your path to financial freedom:
- Throw Out the 30% Rule – Live As Cheap As Possible: whether you are making $10k or $100k, don’t listen to the 30% of income rule for your monthly rent. While you want to live in a place that is safe, you are young and assumingly not married yet or responsible for kids. Either live at home* if you live close to a good job market and you get along with your family or find an apartment/house with a number of roommates. You will be surprised at what you can find out there if you look. You don’t need to live like this forever – but it’s best to sacrifice for the short term. What you want to right now is save, save, save – and invest. Time is on your side. Use it.
- *Don’t Stay Home: If you can afford to move away from home, do it. Staying home may save on rent expenses, but you’re limiting your job market. Unless you are fortunate enough to have a house in a hot (read – pays well) job market, you’re only hurting yourself by staying home. What your objective should be is to get a job in an expensive market and live as cheaply as possible. Commute into where you work (within reason) so you can get the highest income as soon as possible.
- Make Money, Gain Experience: The job market isn’t what it used to be. People change jobs every 1-2 years and that’s the new norm. Fortunately for you, there are jobs out there for people who are specialists at just about anything. If you’re on the path to being a doctor or lawyer, ignore this advice. But – for the rest of you, figure out what you’re good at, and do a lot of it. Work a lot. Freelance outside of work. Yes, you can have some fun but right now you want to be building up your professional portfolio and, ideally, earning income at the same time. For instance, if you want to get into film, get out there and work on as many projects as possible as an assistant and do some of your own projects on the side. There are tons of small businesses that need help – find one or two that can benefit from what you offer, work for cheap for a while, but work a lot. You won’t be there for long. Build your professional portfolio. Your job should either be adding money to your bank account now OR adding a bullet to your resume that will get you a $10k+ increase in pay next year.
- Reduce Your Commute Costs: Do you need a car? If you can take public transit, do it. If you need a car buy something that will last and is safe, but nothing fancy. It’s sometimes hard to do this when you start making money and want to go out and get yourself a new car – but don’t. Your car is just there to take you from place to place.
- Live Below Your Means, But Believe Your Means Aren’t Enough to Live: One roadblock that frugal types get into is that they figure out how to not spend a lot of money (great) so they lowball themselves on early job offers, which compounds for their entire careers. It doesn’t matter if you are the sole breadwinner of a 5+ person family or a single fresh-out-of-school graduate with no debt – the people hiring you don’t care, they just care how little they can hire you for without demotivating you to the point you’ll leave before you provide enough value to offset the cost of the hire. Imagine yourself living the life you’re not living and add up those costs — a studio / 1 bedroom apartment in the city, a car payment on a reasonable new car, college debt, et al. Add up what this would cost per month. Add a few hundred dollars per month in savings for an emergency fund and another few hundred dollars for your 401k. This is the number you should FEEL like you need to earn in order to afford life. Even if you can’t make this amount right away, it sets a good benchmark for what a company SHOULD be paying you for this quality of life. Later on, you can do this same exercise but add more luxury items (i.e. a mortgage on a starter home vs a studio apartment.) This is the money the company should be paying you at a minimum. It’s up to you to make that much, and spend a lot less.
- Invest in Experiences, Not Things: You’re only 20-something once. Don’t buy stuff to clutter your apartment and your life. Stuff might seem nice now, but it does not help you become “rich.” When you do spend money, spend it on experiences – travel the country and/or the world. It can be incredibly cheap to travel in places like Southeast Asia. You may feel like the time now is not something you can part with, but later on you’ll look back and wish you traveled more. If possible, pick up some work while you travel to cover basic expenses. Put your stuff into storage and pay no rent while you travel from hostel to hostel. Do it.
- (Learn How to) Cook: I admit I didn’t do a good job at this in my 20s, and I wasted a ton of money as a result. Cooking isn’t always cheap, but it certainly is lower cost than going out to eat all the time. There are plenty of blogs online with tips on how to save money on food. It is definitely harder as a single person, but if you make friends with the butcher and veggies you can buy by the pound versus in batches, you can make some tasty food for yourself without ending up with enough rotting in your fridge that could have fed a small army.
- Buy Used Everything Except A New Bed: Used furniture is great to furnish a fresh graduate’s apartment. You can often get better stuff off craigslist than IKEA (*IKEA is fine too.) But, don’t buy a used mattress. Not only is this potentially dirty, you also need to focus on getting the best sleep possible. You’ll likely be going out and having fun and not sleeping enough as it is (good for you) so when you do come home and get to sleep, you’ll want to make it count. I bought an $800 mattress as my gift to myself for making it 8 months on my own sleeping on a used crooked futon that made me miserable. Best gift ever. The mattress is now falling apart, but it lasted me 10 years.
- Fall In Love with Compound Interest: You are young. You are going to live forever. So you think. 30 is SO FAR AWAY. (It isn’t.) But, you have many years until retirement. If you haven’t played around with a compound interest calculator yet – do it now (compound interest calculator here.) It will blow your mind. It’s not rocket science, but did you know that:- $50,000 today, in 40 years, will be worth $367,000 with an annual 5% year-over-year increase.
– If you can manage to see 10% increases each year, that same $50,000 will be worth $2.6M in 40 years!
– If you start with $0 and put away $100 per month for the next 40 years with 5% year-over-year increase, you’ll have $153k for your retirement. Increase that to $200 per month and you’ll have $306k. Make it $500 per month for 40 years, and you will have $766k in retirement (*assuming you are investing this money in the stock market with at least a 5% YoY increase.)You don’t need to put a ton of money away this second (it may seem impossible and may BE impossible if you have debts to pay off) but use this information to fuel your interest in picking up more hours, negotiating for better pay, and moving up the corporate ladder as fast as possible to be able to start saving more as soon as possible.
- The Best Two Words: ROTH IRA: The government likes to tax you – they provide very few gifts and one of the best is the Roth IRA. Imagine putting $5000 of your money into an investment account. Sure, you can’t touch that money until you retire – but when you do retire, you can take it out completely tax-free. Say what? You can actually start investing in a Roth IRA when you legally earn income. You do have to pay tax on it up front (which is why it isn’t actually a good idea as you start making more money) but your first few years out of school when you’ll be making very little and paying very little in tax are the best and probably only time investing in a Roth IRA make sense. Unfortunately, there’s a limit each year and if you miss the window for investing that year you cannot go back and make those contributions. There are also limits on how much you can make before your ineligible for a Roth IRA and if you are doing well in your career (esp if you live in a high cost of living area) you will hit them sooner than later (even if you have a lower paid career if you marry someone who makes more you are also ineligible at that point.) For a single person if you make over $117k you can’t invest fully in a Roth AND if you make more than $184k as a married couple you’ll be phased out. There are a few arguments against the Roth IRA (FinancialSamurai – one of my fav personal finance bloggers – has a great post arguing against the Roth IRA here) but I still think that there are benefits for fresh-out-of-college grads. If you read the FS post and decide that Roths are horrible, there’s also the option of the traditional IRA – where you invest pre tax money and pay taxes when you retire – or a 401k if you happen to have one at work. Whatever you do, start investing for retirement now. You’ll thank yourself later when you will have more freedom to make your life what you want. A large chunk of my networth is in my retirement accounts ($200k.) Right now, if I don’t invest another penny to retirement (assuming I retire at age 65) and I earn 5% year over year on my investments over the next 33 years, I’ll have over $1M in my retirement accounts. I might not be able to stay in California, but I can certainly have a rather nice retirement in many other states or countries in the world. If my investments earn 10% YoY for 32 years, I’ll have $5.3M which, even with taxes and inflation, should provide for a very nice retirement and also make it easier for me to take on jobs for “love” versus “money” in my 40s and 50s versus stress about having enough to retire on. I didn’t have access to a 401k until I was 25, so I started out by investing $5000 per year in my Roth IRA (and living below my means.) Best decision ever.