You just graduated from college? Congratulations and welcome to the real world! Just as leaving home and going to college was an abrupt change that required many adjustments on your part, so too will be the transition to getting a job and being fully responsible for your own financial wellbeing. Here are some tips to give you a head start on becoming successful:
- Begin saving from your very first paycheck. This habit, more than anything else, will make you wealthy over time. It is the single most important key for most people who become financially independent. Start with a minimum of 20% of your paycheck…more if you can swing it. Ten percent will be for long-term investing and, in a separate account, the other ten percent will be first for three to six months of reserves; then for future ‘big ticket’ items such as a down payment on a home. Set this up so that the money is either automatically taken from your paycheck or transferred from your bank account to an investment account. If your employer has a retirement plan which matches a portion of your contributions, this is an excellent place to start.
- Avoid ‘bad’ debt. If you could learn this lesson now, it will save you much misery in the future. The definition of bad debt is any debt that is used for purchasing something that is declining in value. For example, if you use a retail store credit card to buy a closet full of clothes and then face months’ worth of payments…that’s bad debt. Using a credit card to finance a big night on the town when you know you can’t pay the credit card bill in full when it rolls around…that’s bad debt. Buying furniture and appliances on credit is bad debt.
- Avoid bad debt around owning a car. I once had someone tell me, “I thought you always had a car payment!” He was dead serious and he was also dead broke! A car, by definition, is a depreciating asset. In fact, when you drive a new car off the lot it depreciates in value about 10% that very day! If you don’t have cash to pay for a car, decide on how much car you can afford based on payments over twenty-four months. In all likelihood, this will be a used car. Once you pay your car off, continue to make ‘payments’ but now do it in an investment account dedicated as a new car fund. Continue to drive your existing car and fund your ‘next car account’ until you can pay cash for your next car and then keep this cycle going forever. That way you have your money working for you rather than for someone else.
- Protect yourself from adversity. Great health may be your greatest asset. There’s an ancient proverb that goes something like this, “A man with good health is a man of a thousand dreams. A man with poor health is a man but with one dream.” Like consistent investing produces wealth, a consistent program of exercise and good nutrition yields good health. This should be one of your top priorities. Believe me; it’s easy to allow other things to seem more important. In addition, build cash reserves in a money market account equal to at least three to six months of your paycheck as a buffer against the unexpected expenses. Also, make sure that you cover the insurance basics including owning disability income insurance, health insurance, auto insurance and life insurance if you have family dependents.
Realize this…as a college graduate, the only limitations you have are the ones that you place on yourself. Create a vision of what you would like to accomplish; develop a written plan; be prepared to ‘correct and continue’ along the way; and focus on continuous improvement. There is nothing you cannot achieve!