Michael Lewis is a retired business executive who writes about careers and personal finance topics on the website, Money Crashers.
College graduation is one of the more memorable moments of a person's life. Parents beam with pride, thrilled with the knowledge they can at last begin to save for retirement. Many graduates, those who have accomplished good grades and academic honors, see their futures as best expressed by Buzz Lightyear in the movie "Toy Story": "To infinity and beyond!" Others console themselves with the words of our 43rd president, George W. Bush, in his 2001 commencement address at the Yale University: "And to the 'C' students, I say you too may one day be President of the United States."
While graduation marks the end of one period of your life, it is also the beginning of a much longer period of achievements, failures, triumphs, and disappointments. What you make of your life and the path you choose are measures of your values and integrity; in the words commonly attributed to another president, Theodore Roosevelt, "A man who has never gone to school may steal a freight car, but if he has a university education, he may steal the whole railroad." Con man or corporate mogul, the choice is up to you, but your decision will be easier if you understand and master the role that money will play in your future.
College students often live a sheltered environment where money matters are unimportant or relegated to the future. Perhaps your parents were able to provide ample financial assistance to keep you sheltered, fed, and in good health. Or maybe the university was willing to provide scholarships and easy loans to cover your expenses - loans whose payments could be postponed, or so it was promised, until you settled into a high-paying career with more income than you could possibly spend. You probably assumed that you, after graduation, could easily and simply transition into a life similar or better than you were accustomed as a ward of your parents. You go to bed one night and everything is good; the next morning, reality hits you right between the eyes.
College graduation means you are an adult and are therefore responsible for your own care and expenses, needing your own source of income from a job, continued charity, or adding even more debt to be repaid in the future. Whether you are employed or still looking, you are expected to manage your everyday expenses prudently, to live within the level of your income regardless of its source. A budget is indispensable for understanding and controlling where your money goes, and the information you glean will also be useful when your prepare your annual tax return.
Time Is Money
As people progress through their careers, they eventually learn that the value of money is the time it saves - the more money you have, the more time that is available to do what you want, rather than what someone like your boss wants. Having wealth means you don't have to mow the yard, wash the car, or fix the leaky faucet - you trade your money for another person's time to do those chores. When you don't have extra money (which is the usual condition of recent graduates), you will need to do things for yourself, using time to learn as well as perform those services which you need.
For example, eating in restaurants regularly is an expensive proposition, since you are paying for the ingredients as well as their preparation and presentation. On the other hand, learning to cook for yourself not only saves money and provides better nutrition, you may develop a skill that is both useful and attractive to potential spouses.
Examine your expenditures and determine what feasible alternatives may be available that can save money without detracting from your enjoyment or purpose. Do you really need a private vehicle in a large city like New York, Chicago, or Atlanta? If a vehicle is necessary, is a new 2013 Scion FR-S (the most popular car for new college graduates according to the "Houston Chronicle") really better than a 2009 Toyota Matrix S AWD? The difference is more than $14,000, according to the Kelly Blue Book 2013 June prices, to say nothing of increased insurance costs and worries about inevitable door dents. A serviceable gift car is almost certainly more economical than one you purchase.
The Difficult Job Market
The job market for college graduates has been tough for a number of years; fortunately, as the economy has improved, the likelihood of finding employment has increased similarly. However, according to a recent McKinsey & Company study, nearly half of recent graduates say they are in jobs that don't require degrees - more than 15% of taxi drivers and firefighters have college degrees today versus 1% to 2% in 1970. If you find yourself unemployed or underemployed after graduation, it is more important than ever to minimize your expenses as much as possible, including the dreaded "living with parents."
The McKinsey research also suggest that few college graduates fully use the placement services of their college or the school's alumni network. Universities have a vested interest in helping their graduates find employment. Take advantage of their services, whether it is helping with resumes, cover letters, interview preparation, arranging interviews, or finding internships. Persistence will pay off.
Important Financial Tips After Starting Your First Job
Starting a career is often daunting even after you've been lucky enough to land a job. The myriad of choices about employee benefits, student loans, the deluge of credit card applications that follows graduation can be Byzantine.
Remember these tips as you begin your journey of the employed:
1. Selecting Your Initial Employee Benefits
One of your first tasks upon being hired is determining which, if any, of the employer benefits are worthwhile for you. The first rule is to "never look a gift horse in the mouth"; if the benefit is free, take it. You may never use it, but it's nice to have if it is needed.
Most employers offer different types of group insurance, although you will be expected to bear a portion of the cost. Typical company insurance benefits include:
- Health Insurance: Even smaller companies will be required to provide health insurance in 2014 due to the passage of the Affordable Care Act. Even though you are in good health and unlikely to need expensive medical care, health insurance is a must. Initiating a health savings account (HSA) coupled with a high-deductible health insurance policy will lower your premiums.
- Dental and Vision Insurance: Young, healthy people can go without seeing a dentist or ophthalmologist for a few years. In addition, dental plans usually only cover preventive or routine care 100% with big cost shares for more complex care, while real health issues with your eyes (cataracts, detached retinas, glaucoma, injuries) are covered by basic health insurance. The cost benefit of these plans are questionable if your income is limited. Fortunately, these expenses may be deductible for income tax purposes.
- Disability Insurance: This insurance is frequently overlooked since many employers provide it free to employees due to its low cost. The facts are that you're more likely to suffer a crippling disability at some point in your career than a premature death, and disability insurance will typically provide 60% to 70% of your pay if you can't perform the work you previously did before the disability. Take the disability insurance offered by the company or purchase it yourself in the open market, even if you must pay for it yourself.
- Group Life Insurance: The purpose of life insurance is to ensure that one's financial responsibilities to others are met in the event of a premature death. The statistical probability of death at an early age is low, about 0.125% and 0.0431% for males and females, respectively, at age 21. As a consequence, premiums for insurance are low. On the other hand, a single young person without children has few responsibilities, so the need for insurance is also low. Buying large amounts of life insurance when you are young with no responsibilities is akin to playing the lottery, except the winners are your beneficiaries. Buy just the amount of insurance needed to pay your bills and funeral expenses. The money you save can be invested for better returns elsewhere.
2. Dealing With Crushing Student Debt
According to The Project on Student Debt, an independent nonprofit organization working to make education more affordable, the average amount of student loan debt for the class of 2011 was $26,600, up more than $1,000 from 2010; 10% of borrowers owed more than $54,000. You are probably aware than federal student loans require repayment in virtually every circumstance except death or permanent disability (including bankruptcy under certain circumstances). Fortunately, repayment can be deferred in the event of unemployment or economic hardship.
In addition, there are a variety of loan repayment plans, including:
- Public Service Loan Forgiveness. The remaining balance of the loan is forgiven after 10 years (120 payments) if your work in certain occupations
- Pay As You Earn. Payments are limited to 10% of your discretionary income over a 20-year period
- Extended Repayment Periods. Terms are extended from the standard 10-year schedule up to 25 years
Some financial advisors have suggested borrowing money to pay off student loans earlier since lenders often have introductory low-interest rates that may be lower than those on the student loan. That strategy may be akin to "jumping from the frying pan into the fire," since private lenders almost always employ aggressive collection techniques than Federal lenders, are less likely to compromise, and more likely to implement punitive interest rates. Defer decisions to repay student loans until you're comfortably set in your job and can meet your basic expense without difficulty.
3. Easy Credit
In the third quarter of 2011 alone, Citigroup mailed 346 million pre-approved credit cards to Americans, more than one offer to every man, woman, and child living in the country. In 2012, following one of the worst financial crisis the country has endured since the Great Depression, more than 418 million offers were sent out to the 70 million Americans with sub-prime credit scores, those borrowers with a history of defaults and/or poor repayment. Chances are, if you want a credit card, you can get one.
Credit cards do have their place. They are essential for making travel reservations or car rentals, they provide some security against fraud and damage when buying goods or services, and credit cards are essential for emergency funds.
You can avoid the disastrous consequences of credit card misuse by doing the following:
- Limit Your Credit to One or Two Cards. A card solicitation doesn't mean you should accept the offer. Most solicitations should be torn up and trashed. You're more likely to build a good credit standing with one card handled responsibly than five cards where you make minimum or no payments, borrowing from one to pay off another.
- Use Cash or Debit Cards When Possible. Credit cards sever the pain of payment from benefits of the product or service purchased. Using a credit card for payment is as if you are getting something free; therefore, you are not as discriminating as you would be if you were reaching into your billfold and handing over cash.
- Pay Off Your Balances Every Month. This ensures you don't overspend, and minimizes the interest you are charged each month.
4. Living Lean
The greatest benefit of being young is freedom, the ability to go where and when you please with few responsibilities and little consequences. But most of us quickly begin to accumulate what George Carlin famously named"stuff," tying us down and complicating our lives with more expense and worries. "Unnecessary possessions are unnecessary burdens," said Peace Pilgrim, a famous American early 20th century spiritual leader and peace activist. "If you have them, you have to take care of them! There is great freedom in the simplicity of living."
Many graduates, working at their first job, expect to live in the manner to which they were accustomed while in their parents' home, forgetting those comforts and surroundings were possible only because their parents decided to defer immediate gratification for long-term security and comfort. Controlling your appetites, spending less than you earn, saving for the future rainy day or a family are habits developed through fiscal discipline that will pay great dividends in later years. Save at least 10% of your gross income each month by postponing momentary pleasures, buying for value rather than prestige, and paying for utility, not style will keep you on the path of financial success and security. This 10% amount includes the investments you will be making in employer savings accounts such as 401ks and IRAs.
5. Sure Investment Winners
Many companies offer employees one or more tax-advantaged savings plans in which they match the employee's investment up to a certain level. A 401k plan allows you to contribute up to $17,500 (in 2013) and deduct the contribution from your gross income for tax purposes. Some employers match as high as 25% of the contribution. The balance grows tax-deferred until withdrawals at retirement. An individual retirement account (IRA) has similar tax advantages, with a limit of $6,500, and can also include a level of employer matches.
You should take full advantage of these plans, having an amount deducted from your payroll check at least sufficient to get maximum advantage of any matching funds. As your income grows from raises and bonuses, increase your contributions. All money invested in these accounts are fully transferable if you change jobs, and provide a full range of investment options.
Despite the attractiveness of an employers matching retirement account, it does not take the place of a regular savings account for emergency situations. Invest the difference between your gross savings and your contribution to employer-matching accounts in a savings account with a bank or credit union. After you've accumulated an amount equal to six months of net income, you should begin to investigate other investment vehicles like common stocks, mutual funds, and exchange traded funds. Your choice depends upon your tolerance for risk and the characteristics of each investment option.
As you begin your new job and career, you are likely to feel overwhelmed at times. Almost everyone reaches a point where they have less money than places to spend it. According to research, money problems are the leading cause of divorce and suicide. When and if money problems threaten to overwhelm you, remember the wisdom of two very different philosophers: Jim Morrison, the lead singer of The Doors, who said, "No one here gets out alive," and Art Linkletter, late television personality on the show "Kids Say The Darndest Things," who expressed it best: "Things turn out best for the people who make the best out of the way things turn out." Life is a journey, not a destination - you would do well to keep that in mind.
What other tips can you offer to college grads?
(Image courtesy of stockimages / freedigitalphotos.net)
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