If you could rewind your life to graduation from high school or college, what would you have done differently with your money?
Confession: I’m a financial voyeur. For as long as I can remember I’ve been fascinated by the unique relationships people (and especially women) have with their money. So when I was recently asked by my Alma Mater, Wellesley College, to serve as a Financial Fellow in residence and create some unique personal finance programming for students and alums, I jumped at the chance.
One of the most popular events we held was called “Powerful Women & Their Pocketbooks.” In this session, I asked three VERY successful Wellesley alums (C-suite level, corporate board member, business founder, etc.) what their best and worse financial moves were right out of college.
By design, we did not compare notes before-hand. Alums were from the classes of ’68, ’73, and ’90 – so spanning various stages in businesses receptivity to women leaders. What struck me the most was how incredibly similar our best tips (& worst trip ups) were despite very different ages, career choices, and life experiences. The top three pieces of advice every one of us gave were:
- Learn to live within your means right out of the gate – and understand that means your life likely won’t look like mom & dad’s right away.
- Bow down and respect the incredible power of compounding – start saving right out of school no matter how hard it hurts & how unpleasant the tradeoffs.
- Be an advocate for your own financial security – whether in the workplace or on the home front.
The biggest mistake all four of us ‘fessed up to, had to do primarily with points 2 & 3. In my case, my dad had to drag me kicking and screaming in my early 20s to move my hard-earned long-term savings into equities (I’m incredibly risk adverse). My other big mistake was thinking that if I just kept my head down, was a “nice girl,” and worked my backside off… my work would speak for itself and there was no need to proactively negotiate my salary.
So, if you have a young grad in your life – I’d like to ask you a favor. Please share with them some of your best and worst financial moves. The more intergenerational dialogue we have about the basics of personal finance the better off this country will be. And if you are looking for a practical graduation gift, I highly recommend GENERATION EARN, written by Kimberly Palmer, Senior Editor of Money & Business for US News & World Report. To get your mind marinating about possible topics you can talk about with the young grads in your life, Kimberly kindly shares below some very powerful tips. Note the common themes! [For more of Kimberly you can follow her on Twitter at @AlphaConsumer, visit her book’s website, and read her column in US News & World Report]
7 Money Mistakes Today’s College Grads Make (and how to avoid them)
by Kimberly Palmer of US News & World Report
This year’s college graduates face a particularly daunting array of financial challenges: Hefty student loan debt. A tough job market. Complicated financial options, from Roth IRAs to consolidating student loans. It’s overwhelming, but not insurmountable. These seven mistakes and their solutions, adapted from my book Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back, are designed to help college grads bypass common hiccups and take control of their financial lives.
1. The Problem: Taking on too much debt – or not enough. Too much debt can weigh down recent grads, forcing them to spend more money on interest and fees than on fun and other goals. The new credit card regulations make it harder for anyone under the age of 21 without their own income to take out cards of their own, which could make post-graduation overspending even more tempting and as intoxicating as frat parties are to college freshmen. At the same time, the recent recession has led many young people take the debt-is-bad message too literally. Avoiding loans altogether, however, can hurt college grads. Sometimes, student loans for graduate school or a mortgage are good investments. Being responsible for credit accounts also allows 20-somethings to build their credit history, which is required if one day they want to take out a mortgage, auto loan, or other type of loan.
The solution: Build your credit history slowly and steadily, by opening up accounts in your own name and then paying them off on time.
2. The Problem: Becoming victim to rapid lifestyle inflation. You’re a recent college grad, so that means you probably need a new car, new apartment, new sofa, and a new… Wait a minute. Not only do you not need all those things, but you probably won’t appreciate them much, either. A little theory called the “hedonic treadmill” explains why. We adapt all too quickly to improvements in our lifestyle. That 60-inch television that you drooled over at Best Buy will soon start blending in with the rest of your furniture, along with your top-of-the-line coffee maker and pillow-top mattress.
The solution: Instead of using your first paycheck to make your new digs look like a sitcom set, spread out your purchases over time. Maybe you need a bed right away, but that embroidered duvet cover from Pottery Barn can wait.
3. The Problem: Falling into bad money habits. Bi-weekly $20 happy hours, daily $15 lunches, and nightly take-out are just a few of the bad habits that eat into new grads’ bank accounts. While the occasional lapse isn’t a problem, repeatedly wasting money on a weekly basis for years will cost you big-time.
The solution: Learn to cook, by enlisting the help of friends, family members, or your favorite celebrity chef (via the Food Network). The habit can save you hundreds, if not thousands, of dollars a year, and turn your home into a popular destination for friends. It’s a skill that lasts a lifetime.
4. The Problem: Waiting to save and invest. Sure, you don’t feel like you have an “extra” money yet, and you’re still getting used to seeing your name on a paycheck. But that makes it the perfect time to start saving at least one-quarter of your income for your future goals, including retirement. The first priority is to establish an emergency savings account with at least three months of expenses that can get you through any unexpected bumps, from unemployment to a car accident. Then, start saving for retirement. If your employer offers any type of 401(k) matching program, take advantage of it – passing it up is like saying no to a pay increase. Then, open an after-tax savings account for your other goals, from traveling to homeownership.
The solution: If saving any money seems daunting, then start by funneling a modest 2 percent of your income into a high-yield saving account or money market fund. Then, slowly raise that percentage. Once you have your three-month emergency fund stored away, then consider investing a portion of your longer-term savings in low-fee index funds and other more aggressive investment vehicles.
5. The Problem: Failing to negotiate for a higher salary. Even in this economy, employers expect some haggling over salary and benefits. In fact, doing so is a sign of professionalism shows that you, a recent college grad, understand how the working world works. A simple request after expressing enthusiasm and appreciation for the job offer can eventually lead to hundreds of thousands of dollars more in lifetime earnings. (Linda Babcock of Carnegie Mellon University calculates that not negotiating your first job offer can result in a loss of up to $1.5 million in lifetime earnings.)
The solution: Practice your job offer conversation in advance of receiving any potential offers so you’re ready to land a better deal and research your field ahead of time so you know what to expect. If the salary really is fixed, then consider focusing on other benefits, which can be worth as much as a third of the salary but job seekers often overlook. What are the health care benefits? Retirement account perks? Vacation days? Work-at-home flexibility? Decide what’s important to you and get ready for some professional haggling; it usually just takes one round of back-and-forth.
6. The Problem: Thinking you’re done studying. Sure, you have your degree, but unless you attended one of the few schools that teach personal finance, you probably know relatively little about how to build wealth. That makes the post-graduation period the ideal time to take matters into your own hands.
The solution: Look for ways to learn more about smart personal finance strategies, and it doesn’t have to be boring. Dozens of blogs, websites, and books make learning about money fun, and many local community colleges and universities offer personal finance courses for local professionals. You might also want to consider forming a money club with friends, where you meet up once a month to talk about your money questions, goals, and research.
7. The Problem: Getting buried in paperwork. There’s no avoiding the fact that being an adult comes with some secretarial duties. Suddenly, you have pay stubs, health insurance forms, tax documents, and credit card statements to keep organized. It’s easy to let them build up until you just want to shred the pile and toss it in the trash.
The solution: Take advantage of modern technology by going paperless whenever possible. Online accounts are easier to manage (and, bonus, better for the environment). New websites such as shoeboxed.com keep your receipts organized online, which is especially helpful at tax time. Mint.com makes it easy to track your spending and establish a budget.
A big thanks to Kimberly for sharing these seven tips.
Is there anything you’d add to the list to help recent grads learn from your past experiences? If so, please leave a comment and share your wisdom!