Congratulations to those college graduates who have completed their formal education and will now begin a new phase of their lives as they pursue their careers. You’re graduating during uncertain and unusual times and yet, there are more opportunities than there ever have been before.
When I graduated college, if you got a job in Chicago or Austin, that’s where you moved. That’s not the case today. With technology the way it is, you can live in one part of the country and work in another without difficulty.
No matter where you end up working or living, one ingredient that I think is essential to your success is your dedication to taking care of your personal financial affairs. Financial difficulties can upend even the most successful individual.
There are a handful of things that you need to do with regards to your personal finances that will improve the quality of your life. I don’t believe the more money you have the happier you are. After all, I’m not sure Bill Gates is so happy these days. However, having financial difficulties will put added stress and burdens on relationships, and it’s not good for your health. Therefore, as you start your careers and your new life, it is important to dedicate yourself to taking care of your finances.
I believe a balance sheet is the beginning for anyone who wants to get their financial house in order. A personal balance sheet is nothing more than a listing of your assets and liabilities. For most college graduates, most likely there are no assets or investments; rather, there tends to be debt, such as student loans.
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I generally recommend updating your balance sheet twice a year. By completing a balance sheet, you will stay in touch with what you have and what you owe and understand if you’re moving in the right direction. In completing a balance sheet, assets, less liabilities, equal net worth.
One of the things that’s always a challenge for graduates is living within their means. When I say living within your means, it means that your take-home pay covers all your bills. Covering bills does not mean paying the minimum on your credit card, it means zeroing your balance on a regular basis.
In establishing a budget, I think it’s important that you pay yourself first. Therefore, my recommendation is to fully fund your 401(k) plan or other type of retirement plan you may have. I know someone who is 30 and 40 years away from retirement is not thinking about retirement; however, they should. The sooner you start saving for retirement, the greater likelihood that you’ll have the resources necessary to give you a quality of life in retirement. Therefore, in looking at money you have to spend on your lifestyle, you first have to take off the top the money you’re saving for your future.
If you are graduating with debt, it is important that you have a strategy to pay that debt off as soon as possible. I suggest focusing on paying off the highest interest rate debt that you have. Typically, that will be credit card debt. It’s not unusual for credit card interest rates to be at 20 percent while student loans may be at five or six percent. The goal is to be debt free as soon as possible and to stay debt free. You’ll know you’re running into financial difficulty if you can’t afford to pay off your credit card when the bill comes due.
This is a very exciting time for college graduates. It is important to establish a good foundation for the future and take care of personal financial affairs. There are real consequences to not being fiscally responsible, and once you dig a hole, it’s sometimes very difficult to get out of it.
New graduates must take personal financial planning seriously and learn to live within their means. Life is full of all sorts of pressures; some you can control, some you can’t. When it comes to personal finances, you are in charge, and by being fiscally responsible now, it will pay substantial dividends well into the future.
Congratulations and good luck.
Rick Bloom is a fee-only financial advisor. His website is www.bloomadvisors.com. If you would like him to respond to your questions, email rick@bloomadvisors.com.