“The first principle is that you must not fool yourself — and you are the easiest person to fool.” – Richard Feynman, Nobel laureate and physicist, from his speech to the Caltech Class of 1974.
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Wow, all I had was, “Graduates, as you head out into the world, remember to be good to one another… And remember to spend less than you make.”
I don’t think Dr. Feynman was referring to personal finances, but I could argue that right there, he offered some of the best money advice you can find. I say that because so much of “adulting with money” comes down to making sensible decisions, yet it’s too easy to get off that track and fool ourselves with “I need that new car, a higher credit card limit, a sports betting account, the XYZ streaming service,” etc.
What should be on the financial radar for new college grads? It can’t all be done in a day, but it all can be done. This isn’t really life advice – it’s personal finance advice – but there is probably significant overlap.
First, get to work. Whether you are diving right into the “grown-up” job related to your education or just trying to earn while you look, it’s critical to get the earnings flowing. All work experience is valuable, even some of those awful jobs we hold as we move down the career path. I’ve had a lot of jobs. Maybe I even have a spreadsheet listing them to share with my son someday. Maybe it’s a couple of pages long. Learning what you don’t like or don’t want to do has value. I am now doing the best work of my life, and even the worst work experiences from my resume have contributed to the skills I use today.
Take advantage of time. I put this high on the list for a reason. There are a lot of reasons but let’s focus on opportunity cost or the cost of decisions. When it comes to retirement savings and the cost of missed opportunities, I know what I’m talking about. A 25-year-old let’s say YOU, who saves $200/month until age 65 will have accumulated approximately $525,000 (based on 7% returns and average inflation). Someone else, let’s say ME, who waits until age 40 will have to put away $700/month to reach that same amount of savings by age 65. There is no better formula for reaching your financial goals than time + steady habits. Check out Vanguard’s take on this topic and/or try out this calculator and run some numbers for yourself.
Learn to budget. No matter how much you are making, learn now how to plan and account for your spending. Many banks offer budgeting features, there are plenty of free apps and websites, and, of course, there is the old-fashioned but most effective spreadsheet.
Make saving a habit and build an emergency fund. If you are collecting a regular paycheck, consider automating your savings and build up a $1,000 emergency fund as quickly as possible (before investing, before the long ski trip, before anything considered a “want”).
Manage your housing costs. Housing is and will be your largest expense, so it’s best to get used to making smart decisions. You want your own place, but maybe your future self says, “Hey, do the roommate thing for a few years, it will save you thousands.”
Take charge of your student loans. You signed for the loan, and now it’s time to pay it back as agreed. Pay what you should but do it in the most sensible way for your income. Visit StudentAid.gov, make sure you are on a plan, stay in touch with the loan servicer, and understand all your rights and responsibilities.
Understand health insurance. This is one of the most expensive and difficult to manage aspects of Americans’ financial lives. If you are fortunate enough to be on your parents’ plan, you can stay there until you turn 26. Beyond that, health insurance is a major consideration when looking at potential jobs and has to be accounted for every step of the way.
Learn about taxes. The good news is that there are plenty of easy-to-use, accurate, and reasonable software services out there. The bad news is that as you move into earning a full-time income, taxes will eat more of your pay and the rules will get more complicated. Enrich offers an excellent introduction to dealing with income taxes.
Watch out for car loans and credit cards and payday lenders, and rent-to-own… And, ugh, there are a lot of places to misspend your hard-earned dollars. Buying too much car is one of the most likely areas where we stumble, and that impacts our ability to save, and that affects our choices down the road, and so on and so on. Drive used cars, borrow as little as possible, and always save part of your income for car expenses and the next car.
Protect your identity and your money. In other words, be careful with your financial life and technology, and be sure to be insured! Car insurance, renter’s insurance, health insurance – all those pieces should be in place as you begin to save and build wealth. Ask a friend or family member for a trusted agent, get some advice, and evaluate your coverage every year. For protection from financial scams, stay current with help from sources like the Federal Deposit Insurance Corporation (FDIC).
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Finally, listen to your future self. I could go on all day. So, when I say finally, I mean for now.
Yes, you hear that voice. It’s firm, sometimes mean and annoying, but always kind and full of good intentions.
“Are you saving for retirement?”
“A new car? Really?”
“A few sacrifices now will be worth it later.”
“Have fun, but plan for it and understand what it costs.”
“Spend less than you make, or I’ll come through time and…”