'You've worked hard for your money, make it work for you.'
This tagline certainly means something different to those in varying stages of their lives. For example, a 27-year-old just starting a family will want to manage their money differently than a 65-year-old preparing for retirement. To help those in all stages of life, we’re pleased to bring you a Life Stages Series to discuss how investing should differ depending on your situation. To honor this time of year, where so many hopeful youngsters are leaving school and starting their lives, we will start with the Graduate Edition.
Life Stages: The Graduate
If you are graduating from high school or college, congratulations! This is an exciting (and scary) time of your life! Whether you’re leaving school debt-free or you’ve taken on some student loans, here is some advice on how to start our your new life on the right financial foot.
Start saving now! When I first started my career in the wealth management profession, one of the older consultants in the firm where I worked gave me a piece of advice. He said if a college graduate started saving 5% per month from every pay check, she/he would not have to worry about retirement, assuming retirement age of 65.
Start good spending habits. Spending, in some respects, is the mirror opposite of saving. When you impulse spend, you forego future saving. If you were to apply a hypothetical 8% return to each dollar of unnecessary spending, you would see that you’re foregoing an opportunity to double those dollars every nine years in the future. You spend, you lose.
Watch your debt. Debt is a wealth killer. I’m exaggerating a little. Obviously using debt wisely is necessary and can be a good thing. When buying a home or some bigger ticket items like a car, you are using debt wisely and building your credit. But high interest credit cards and the like are a costly way to acquire stuff. Every dollar of interest paid is a dollar you won’t be able to save.
Build your credit history. How well you use debt will reflect on your credit history. A good credit record actually impacts your standard of living. A lower credit score impedes your ability to acquire anything on credit at the most favorable interest rate. Thus, you spend more to acquire things.
Think about risk management. Life insurance is a necessary tool for protection of your love ones if you’re not around. We believe you should buy a good term policy. It’s less expensive, so you get more coverage per dollar spent. Most insurance companies tout whole life for its so called savings feature. We believe that if you keep saving and insurance protection separate, you’ll get more for what you spend in each area.
Consider your student loans. Paying off your student loans as quickly as possible is a good way to pave the way for your future. Creating a plan for repaying your student loans as soon as you graduate is essential. Meet with a financial planner who can help you set up an automatic payment plan and calculate how much over the minimum you can pay each month to reduce the amount of interest you end up paying. Remember, the quicker those loan payments go away, the sooner you will become financially stable.
Graduation is a great time to transition into ‘real life’ and there is no place more pertinent to do so than in your financial life. Keep the above in mind as you being your new adventure and you’ll be ahead of most of your peers!