Whether you are a recent college graduate or not, many of us get distracted by the tangibles that often times create financial obstacles. Along with these obstacles, we avoid many of solutions that prevent us from attaining financial freedom. I have identified several financial basics that all college graduates should undertake. Unfortunately, many college graduates procrastinate until they are in a financial position that forces them to begin to pay attention. Often times I find myself explaining these financial basics not only to college graduates but also married couples, parents, and even those individuals approaching retirement.
Regardless of your financial posture or where you are in the life cycle, I consider the following a financial “road map” to attain financial affluence.
1. Pay down debt: Student loans and credit card debt are just a few examples of the debt that should be paid down as soon as possible. These types of debt bear interest rates that range from 3.4% to as high as 25%. My rule of thumb is if you can’t earn more by investing, then pay down the debt. I hate to say it, but it is tough to earn 25% in any economic environment.
2. Avoid credit card debt: If you don’t know how, then don’t use it. It is tempting to use a credit card as a backup until you find yourself on a slippery slope. If you are going to use a credit card you should be prepared to pay the balance off on a monthly basis. Not having the tangibles your buddy may have is boring right? I assure you it isn’t nearly as boring as hearing the same friend complain about being broke many years later.
3. Be sure you are properly insured: People don’t go bankrupt because they pay too much in insurance premiums. They go bankrupt because they don’t have sufficient coverage. Carrying the minimum liability limits on your auto policy is not acceptable. Too often I hear people complain how much their auto insurance is costing them. In many cases an auto policy can be one’s greatest asset.
4. Avoid the short-term gratification: Yes, having a new BMW like your friend may seem appealing at first, but it can destroy your finances. A $500 BMW auto loan payment probably doesn’t make sense until you are earning well over $100,000.
5. Establish an Emergency/Opportunity Fund: Before you begin investing, you should have sufficient liquidity in the event of an emergency or an unexpected opportunity. This fund may turn out to be quite valuable. (See Rianka’s post on Emergency Fund).
6. Set your savings on autopilot: You should be prepared to set aside money from every paycheck you earn. Until you have, it will be difficult to reach the next level of your finances. As the old adage goes, “pay yourself first”.
7. Invest: Once you have a working budget and you’ve set aside money for an emergency or a potential opportunity, you can now begin investing. Ideally anything not consumed by your living expenses should be invested. I hate to say it but your checking account is only earning you 0.01%, if that. Storing $10,000 extra in your bank account isn’t doing you any good.
8. Other goals: Now that you are “paying yourself first” (i.e. retirement savings) on a continual basis you can begin saving for other goals. These types of goals include a new car, a trip, or the most common, a new house! Notice I said continual basis, this type of saving should be in addition to what you are already saving. It would not be prudent to buy your first, second, or any house with your retirement savings.
This “road map” isn’t anything new, but it is certainly ignored too often. I think we have all been in a situation where our GPS has taken us down the wrong path. I persuade you all to venture down the path mentioned above. How you get there will be entirely up to you, but I assure you that following these directions will ensure you arrive safe and sound. Don’t become grouchy now; be prepared to have a good time! This trip will be quite rewarding!
Andrew J. Miller CFP®