The Financial To-Do List For College Grads

8685217_sEvery year I am asked to teach to the graduating class of my alma mater, Massachusetts Maritime Academy, a class on how to create good financial habits. It is a very popular class. And one that I wish I had available to me when I was their age. This year, I was pleasantly surprised. You see, usually, when I speak to young folks, it is a battle to get them to understand the importance of saving and planning for their long-term financial needs but this group was already on board. Because this generation is facing so many challenges with our current economy, it was great to see such a high level of interest from them in learning how to create financial security!
I was able to skip the “save for your future . . . your most valuable asset is time” lecture and jump into specific advice on how they can start off on the right foot when they enter the real world. As many young folks are nearing their college graduation and about to dive into adult life, I figured these tips would be good to share with all of you Cutter Family Finance readers as well.
A young man named John started off the questions by asking me what to do with his $60,000 in student loans. I told him to do his best to unburden himself from the black cloud following most college graduates: Debt. Anyone who has taken out a loan knows the math behind interest, and the value of paying off that debt earlier rather than later. After explaining to this group that Uncle Sam will earn about $135 billion over the next 10 years from the interest on student debt, I explained that it is ideal to put 15 percent of total salary toward paying it off. But as John quickly did the math, he raised his hand and asked what to do if he cannot afford 15 percent.
What I explained to John is important here. I told him to make sure he can pay for food, water and shelter, (and maybe some beer); and if he can manage 15 percent of his salary, while paying for all that stuff, then do it! I told the group that, more importantly, they need a process; a system in place to pay off this albatross and they need to be consistent in their efforts to accomplish this goal. I offered a suggestion. The first year out of school, make the minimum payment. Each year as their salary grows, add another 10 percent to their payments, religiously. This simple system could cut the duration of their loans by one-third.
I also talked to these graduates about the importance of an emergency fund. Creating an emergency fund can be a hard thing to do, stashing money away for nothing in particular when there are so many things they want to buy now but it is worth it. The goal is to save three to six months’ worth of expenses in case something unexpected occurs, like needing to fix a car or losing a job. One way to avoid the temptation of spending this money is to open a separate savings account and have automatic payments made from a primary account into the emergency fund each month. That account can stay out of sight and out of mind, which helps when trying to save.
I told the cadets that the key to these first two tips is to create a budget, especially if they have a major purchase or goal on the horizon. Do they want to buy a new car in 12 months? Or purchase their first home in five years? They need to understand how much money they have coming in and how much they have going out. They need to calculate their monthly income (after Uncle Sam takes his cut) and track their expenses each month. This includes their debt payments, emergency fund savings, rent, food, concert tickets, gas, et cetera. What they have left after these expenses are subtracted, can be added to their goal. If they know they need $6,000 for a car, and they have $500 left over to add to their savings each month, then they can reach that goal in roughly a year. I explained that if their time line does not match their goals, they can always look for odd jobs or ways to give their savings a little boost each month. If they don’t want to do this budgeting and tracking by hand, there are several tools and apps, like Mint, that will do the number crunching for them. Folks, I cannot emphasize how important it is to teach our youth budgeting. It is a blueprint to financial success.
The last tip I gave this group pertained to something that they will all likely be encountering in the next couple of months and it is something that young people in this market are notoriously bad at: negotiating their salaries. Many new college grads who have just spent the last four years paying, rather than earning, are excited about the prospect of having a job and the paycheck that comes with it. It is important for them to make sure that paycheck is what they deserve. Every job applicant should research online and figure out what the average salary is for the position they are applying for. I told the graduates that when they are discussing salary, not to get baited into throwing out the first number because they will likely undersell themselves. I suggested that when they do talk numbers, to specify their goals and strengths to explain what they are worth and why.
The real world can be a scary place for college grads, especially with the current state of our economy, but the key is for them to take control of their financial well-being. I finished by telling them what I tell my kids. Some of the most important ingredients to any successful person are to have the desire, the determination and the dedication to succeed. I explained that they will face uncertainty and pain, which will push them to veer from their financial system and give up on their quest to be financially secure. It will be at that moment that those with strong habits push through those obstacles and succeed. I urged them to start now by creating good habits to become conditioned, financially. Because the earlier they start, the better off they will be later.
You know, driving home that night, I could not help but picture in my mind each of those 40 or so fine young men’s and women’s faces and whether I had made a difference in their lives, whether they would capitalize on the life lessons shared by an old “financial” salt, such as I. I reflected on that a bit. As I get older and older, I find myself doing that more and more. I guess, sometimes you never know if you make a difference in a person’s life. But it doesn’t mean we shouldn’t try, right?
Be vigilant and stay alert, because you deserve more.
Best of luck to the graduating classes of 2016!