15 Financial Tips For New Grads
KEY POINTS
Increase your cash flow by 35-65%
House – car – furniture – clothes – vacations - food - credit ratings …. We have you covered
Align yourself with a financial advisor and start growing your net worth today
Congratulations!!!
We highlighted 10 major life milestones in a popular post, but few milestones are as fulfilling as graduating university, college, or completing an apprenticeship. You have spent years soaking up knowledge and are equipped to conquer the world as doctors, nurses, lawyers, accountants, engineers, artists, teachers, electricians, and more.
Now, let’s get personal.
How are you going to allocate your money?
It’s a loaded question with a lot of moving parts.
Unfortunately, the education system is lacking when it comes to personal financial planning. I graduated university and became a CPA. However, I was never offered a single course on budgeting, investing, insurance, types of mortgages, credit card risks, credit scores, foreign exchange, and the list goes on.
So, let’s jump right into it. We have 15 tips to help you start building a strong financial foundation.
1 - Accommodation
In this category, we are grouping rent, utilities, parking, and contents insurance. For illustrative purposes we estimate the average monthly cost at:
That is a lot of money to spend every month.
Good news – you can easily reduce the cost
Bad news – you won’t love the options
Option 1 – Get a roommate (cost savings est. $800/mth)
Option 2 – Move in with parents (cost savings est. $2,200/mth)
I chose to live on my own after university and it was expensive. I enjoyed the freedom and made some great memories. In hindsight I could have forgone that short time of independence in order to substantially increase my savings.
Some of you may have been renting and saving for years in order to obtain the down payment for a house. This process can be very frustrating as your down payment requirements increase proportionately with the increase in housing prices.
All is not lost.
We invite you to read our article Should You Buy or Rent Your Home? A case can be made for renting your home and investing into other markets instead of the housing market.
Reminder
Make sure you obtain contents insurance if you choose to live on our own.
2 - Automobile
Few things can compare to the smell and feel of a brand-new automobile. They can also be rewarding and symbolic of the culmination of years of sacrifice and struggle.
You know what’s coming …
Brand new automobiles are one of the worst financial investments you can make as detailed in our post Car Buying Tips - New vs. Used.
You need to limit your investment in depreciating assets.
A brand-new automobile costing $42,000 may depreciate $21,000 over 3 years or $7,000/yr. on average. A 3-year-old comparable automobile purchased for $21,000 may depreciate $9,000 over 3 years or $3,000/yr. on average.
A used automobile can save the average person $4,000 per year in depreciation. Such does not consider insurance or the annual maintenance costs (be wise, have a trusted mechanic inspect any used vehicle before you purchase it).
Fun Fact
You may not even need a car at all. The larger metropolitan cities have excellent transit systems including commuter trains, streetcars, ferries, and buses. You can supplement government transit with ride sharing companies like Uber and Lyft. Many cities are embracing cyclists with dedicated lanes being added to major streets and bike rentals available.
You may be able to save substantial money forgoing car ownership and choosing to rent a car on those occasions the alternatives noted above do not fit.
3 - Career Mapping
If you are employed …. Congratulations!!!
Very exciting
But is it the right job?
Is it a top paying job based on comparable jobs you are qualified for?
We cannot provide a definitive guide to assess your role. What we can do is encourage you to take a strategic approach to your career path. Research your options. Ask questions of your friends, family, and colleagues. I provide the following examples.
I am a CPA which provides many options including, but not limited to working internationally, partner of an accounting firm, industry accountant, director, consultant, teacher, or I could start my own business.
My electrician friend also has many options including, but not limited to journeyman, master electrician, entrepreneur, teacher, consultant, regulatory inspector, and more.
Your education has positioned you to take advantage of a diverse set of opportunities. Take a proactive strategic approach to find your niche and the best path to take you there. Make sure you consider more than just the base salary and bonus.
You should also factor in the pension plan, group benefits (see below), vacation, office culture, work from home, work / life balance, ability to work internationally, and more.
4 - Learn to Cook
Really?
Yes, this is important.
Dinner out with friends and family fills many needs for mind, body, and spirit. However, it comes with a cost.
A few lunches and dinners out per week can quickly add up to $50-100 per week. You can likely shave $100 per month from your dining budget.
If you are eating out excessively, you need to increase your food preparation skills.
Sounds daunting?
It isn’t. Sign up for cooking lessons. Search up some free recipes on-line. Learn how to shop and prepare the food. Involve your significant other or roommate(s). Put together a group of friends that pool food dishes on a monthly basis. Make it fun, interactive, enjoyable.
You will save money, develop relationships, and eat healthier. It’s a,
Win - Win - Win
5 - Learn How to Shop for Food
Hopefully we just convinced you to reduce your dining out budget and increase your grocery shopping budget. Unfortunately, not everyone knows how to cost consciously shop for groceries.
We are not referring to extreme couponing or maximizing credit card points derived from complex shopping strategies. We are simply referencing the basic grocery store shopping experience.
Grocery stores offer coupons and points programs. Embrace such programs if the grocery stores in your shopping strategy offer such benefits.
Let’s focus on the actual stores you shop at.
First, avoid the high-end hoity toity luxury grocery stores.
Second, compare your primary local grocery store to its discount competitor. Non-perishable items (e.g., crackers, condiments, toiletries) are the same quality at either store. Therefore, it makes financial sense to purchase such items at the discount store. Perishable items are often of higher quality / fresher at the non-discount grocery stores; however, such is not always the case. The cost / benefit (dollars and quality) can vary by week.
You may be able to save $1,500 per year by splitting your shopping between more than one grocery store.
Further savings could be generated by purchasing in bulk or at your local grocery store or warehouse discount retailer.
Fun Fact
The average annual return for the S&P 500 is approximately 10%. Many grocery store items are promoted at discount rates exceeding 10%.
Therefore, you should consider taking advantage of sale promotions related to items you would normally purchase. Bulk purchases should also be considered, if feasible. We do caution that items often go on sale in regular intervals; therefore, bulk buying of sale items may not always be prudent.
6 - New vs Used
Like automobiles above, buying new assets that depreciate is very expensive.
Be prepared to furnish your apartment, if you choose to live away from your parents. A one-bedroom can cost approximately $7,000 to modestly furnish.
You may be able to reduce this expense to approximately $2,000 if you spend the time to search and find used furniture of comparable quality. The $5,000 savings equates to $500/yr. based on a 10% useful life.
Used furniture has several other benefits.
It saves the precious natural resources necessary to produce the given items while simultaneously reducing the pollution generated during the extraction of such resources. It also reduces the environmental footprint associated with the disposal of the used furniture into the landfill sites.
From an economic standpoint, used furniture supports small businesses in your local community, as opposed to multi-national corporations that have little connection to your local community.
The same principle can be applied to clothing, tools, sporting equipment, and more.
7 - Credit Card Debt
It is not uncommon to rack-up excessive credit debt while in school or when you are just starting your career. Such if often a necessary means to an end, and other times it is a result of careless spending. Prudent debt management skills are critical to achieving financial prosperity.
Regardless, if you have credit card debt you must understand that it attracts extremely high interest rates. We recommend you prioritize repayment of this type of debt above virtually everything else: even creating an emergency fund (next point below).
This debt can simultaneously ruin your cash flow, lifestyle, and credit rating (see Credit Rating below). Refer to points 14 and 15 below: Budget and Choose a Financial Advisor regarding how to develop a plan to eliminate the debt.
8 - Emergency Fund
It is essential that you create an emergency fund as soon as possible. Your income is always at risk due to circumstances beyond your control (e.g., employment termination, medical illness, care for loved ones).
Government employment programs do not provide 100% income replacement. Nor does short-term or long-term disability insurance. The negative cash flow can be devastating especially early in your career when you have limited assets and minimal net worth. Your bills will continue to come and failure to pay them on time can have a severely negative impact on your credit score (see Credit Rating below).
You should have at least 6 months of after-tax savings in a separate account. It should be 100% liquid (i.e., cash). Do not touch this balance unless absolutely necessary. Therefore, borrowing from your emergency fund to cover the cost of something discretionary like a vacation is not an option.
9 - Group Benefits
As noted above, medical conditions can be unforeseen and financially devastating to your net worth and credit rating.
Make sure you review your employer sponsored group benefit plan, if any. Look for coverages including health, dental, vision, disability insurance (short-term and long-term), wellness programs, and life insurance.
If your employer does not offer coverage, you may be eligible for coverage under your parents’ employer sponsored plans. You can also obtain private health insurance if employer sponsored options are unavailable.
10 - Retirement and Other Savings Goals
You should start saving for retirement as soon as possible. The power of compounding and growing your assets is most impactful the earlier you start saving. We invite you to read our post The Power of Time and Compound Interest for more details.
Be sure to take advantage of any employer matched savings plans. Your employer may contribute a multiple of your contribution to your account (e.g., 2:1 matching). The employer portion may not vest for a given period. For example, a two-year vesting period means you do not receive legal title to the employer’s contribution unless you are still under their employment two years from the date of contribution.
You may have the choice to open a tax-deferred account, a tax-free account or variation thereof, or a fully taxable account. We recommend you work with a financial advisor to help you choose the best option for your situation.
Such may be a robo-advisor or live advisor. They can help you set short-term and long-term goals as well as create an investment plan tailored to your risk tolerance.
We highlight the common advisors available in our post Financial Advisors For the 99% and explain how to choose the best advisors in our post How to Choose a Financial Advisor - A Definitive Guide.
11 - Student Loans
We just highlighted the need to save for an emergency fund and retirement. This may leave minimal excess funds, if any, for repayment of student loans. This is where points 14 and 15 below become critical: Budget and Choose a Financial Advisor. Your financial advisor can help you integrate your student loan repayment requirements into your financial plan.
Many student loans, depending on type of loan and jurisdiction, have a 6-month grace period of no payments or interest accruing once you leave school. Make sure you take the time to fully understand your repayment terms and options.
Special modifications to your repayment plan may exist related to income level or employment status.
12 - Charity
You may have a desire to contribute to a charity. However, you may not have the current capacity to contribute financially.
Good news, there are many charities that could benefit from your knowledge, skills, and expertise. Your contribution of such talents may satisfy your desire to help. You can begin to contribute financially as your situation evolves.
13 - Credit Rating
It is imperative that you start to build a credit history as soon as possible. A credit history does not require going into long-term structured debt. You can build a credit history by servicing credit facilities including, but not limited to car loans, credit cards, utility bills, cell phone bills, and mortgages.
It is imperative that you pay all of your bills on or before their due date. Such is critical to obtaining to an ever-increasing credit score. The higher the score, the easier it is to obtain credit in the future and at a reduced interest rate.
Our posts How Can Your Credit Report Increase Your Net Worth? and Financial Literacy - Credit Scores provide the knowledge and tools necessary to ensure you can develop and maintain the highest score possible.
14 - Budget
Our first recommendation is set a goal to live below your means. Too often we try to live on a break-even budget and eventually experience negative cash flows due to changes in income or our expenses exceeding expectations.
You need to develop a 12-month budget. Remember to account for the frequency of your pay periods. For example, if you are paid bi-weekly (every two weeks), 10 months will have 2 pay periods and 2 months will have 3 pay periods.
You may have multiple revenue streams. Salary income is consistent; whereas income based on an hourly rate may require more assumptions related to timing and amounts. Seasonal income may cause substantial fluctuations in your monthly cash flows. The ability to supplement your income through the gig economy will improve your cash flows and diversify your income in case you temporarily lose your primary income source.
Expenses can be viewed as non-discretionary and discretionary.
Non-discretionary expenses include, but are not limited to housing, taxes, food, clothing, and insurance. A portion of a non-discretionary expense can become discretionary when it covers more than the necessity required. For example, you may be able to find a one-bedroom apartment for $1,700 that is in a great location, clean, safe, and has all the amenities you require. If you decide to rent a one-bedroom apartment for $3,000 such would include a $1,300 discretionary component.
Discretionary expenses include, but are not limited to dining out, movies, concerts, cable, subscriptions, and travel. You will be forced to make tough trade-offs with respect to these lifestyle expenses.
We believe the budgeting process needs to be tailored to the individual. To that end, our post How to Make a Budget That Works for You provides multiple approaches to developing a tailored budget.
15 - Choose a Financial Advisor
It is never too early to partner with a financial advisor. They can help you set your financial goals and create a financial plan to achieve such goals. Your goals will expand and multiple as you progress through life’s stages. An advisor’s valuable input may tweak the budget you created above.
Your goals may include purchasing a house, funding a wedding, taking a dream vacation, saving for children’s education, starting a new business, retirement, and more.
Our posts Financial Advisors For the 99% and How to Choose a Financial Advisor - A Definitive Guide.
Financial Summary
We highlighted several saving tips. Let’s see how it may impact a typical new grad.
We will assume an individual making $62,500 and paying 20% tax for an after-tax income of $50,000. Our high-level overview above noted the following potential annual savings:
Bottom Line
Graduating and starting your career path can be a stressful experience. Take the time to work through this post. Be sure to find a financial advisor and don’t be afraid to lean into your friends and family as you strive to make all the moving pieces work together.
Enjoy the journey!!!
