I recently received this message from a fantastic client and want to share my insight:
“Hey Nic! I’m curious if any of your newsletters offer advice or perspective on what you tell a young person just entering the workforce?
I have a number of friends with kids who have just graduated college and starting their first jobs and know nothing about 401k contributions, brokerage accounts, before tax/after tax contributions, the triple tax benefit of HSA, etc.
That would be quite the gift to give the kids to start them off on the right foot!”
First, it pains me that our school system and curriculum doesn’t do a better job at preparing our youth with a better understanding of what to do and where to start with their finances.
That said, the timing of this message is ideal and it’s certainly not the first time I’ve heard it so let’s dive in with some basic insight:
[YOUNG FRIENDS, if you’re receiving this, please give it a read and hang onto it—refer back to it once and a while and good luck, you’re going to have a great career]
I’ve been lucky enough to have been a guest on a handful of podcasts recently and have been asked about “my biggest investment mistake.” If you’ve caught any of those episodes or clips you know that I view my biggest investment mistake as my early neglect toward funding a liquid brokerage account in favor of my over-emphasis on my employer-sponsored retirement plan (401k) and IRA.
Here’s where I’d focus as a recent college grad beginning to earn a steady paycheck:
#1 BECOME CASH FLOW POSITIVE
Income minus expenses needs to be greater than zero.
If not, find ways to make more money while looking for creative ways to reduce your expenses.
Until income is greater than expenses, nothing else matters in your financial journey.
#2 DEBT ELIMINATION
After college, try to pay off all non-mortgage debt as quickly as possible.
Aggressively try to pay off any credit card debt (usually the highest interest), student loans (high-interest), followed by vehicle loans (typically less than the three).
The exception to this would be if you can enroll in a loan forgiveness program.
#3 INVESTING 1.0
Invest in an employer sponsored retirement plan if you are offered a match.
Invest enough to get the full match. Try not to leave any free money behind.
#4 SAVE – Emergency Funds & Major Purchases
Begin building a savings account.
We prefer utilizing a high-yield savings account that are generally offered from the online banks as opposed to the traditional brick and mortar institutions. Usually higher interest, easy automated savings options, and it all integrates with an app.
Just please ensure the institution and account you’re opening is FDIC insured and understand the limitations (if any) to move the money back in and out (transaction time and frequency).
Ideally, you’re going to aim for a desired number like 3-6 months’ worth of expenses.
Personally, I prefer tangible numbers:
Gold: $50,000
Silver: $25,000
Bronze: $10,000
#5 INVESTING 2.0
DO NOT INVEST MONEY YOU’LL NEED IN THE NEXT 5 YEARS … EVER!!!
If I could turn back time some 20+ years ago, this is where I would put most of my focus.
My life has been so incredibly wild, but just as unpredictable. I sure wish I would’ve had easier access to my hard-earned investment dollars but also had access to use them as collateral in certain situations here.
The key:
- Open a brokerage account
- Choose a dollar amount that you can invest monthly & automate the investment
- Build a low-cost diversified portfolio
- Rebalance it annually
- When you can add more, add more!
To conclude, here’s a little fun with math:
If you simply invest $100/month for 40 years and earn the average 7.8% = you’ll accumulate $329,521
($250/month = $823,803, $500/month = $1,647,606, $1,000/month = $3,295,213!)
Good luck grads!
If you or someone you’re close to could use help aligning their finances and establishing a financial plan, please reach out to us, we’re accepting new clients and eager to help.
–Nic
