The New Graduate’s Guide to Financial Freedom

 

I graduated from college in 1991 with a degree in psychology and a minor in English lit. I was one course shy of a second minor in speech comm. With credentials like these, it's no surprise that my first job out of school was knocking on doors, selling crummy insurance to little old ladies in Eastern Oregon. I hated the job, but I could not quit. I was trapped by debt.

After I was hired, I had gone a little crazy. Because I would soon be earning a steady income, I figured it was safe to spend some of my future earnings. My car — a silver 1983 Ford Escort — was a piece of junk. I didn't think it made sense to repair it. Fortunately, the bank gave me a loan for a new car. I bought a 1992 Geo Storm. Then, using credit cards, I bought an entire wardrobe of business attire and a Super Nintendo. “It's okay,” I kept telling myself. “I have a job. I'll be able to pay for this.”

Now, with the benefit of hindsight, my mistakes are glaring and obvious. If I had the ability to speak with the J.D. of 1991, I would give him just three pieces of financial advice:

  1. Establish an emergency fund.
  2. Avoid consumer debt.
  3. Save for retirement.

There's more to personal finance, of course, but these three tips will get a young person started on the path to financial freedom.

Establish an emergency fund

I was 35 years old before I learned the power of an emergency fund. If I had an emergency fund in 1991, I could have repaired my Ford Escort instead of taking out a loan to buy a new car. If I had an emergency fund, I would not have been so tied to my job — I would have been able to afford to quit.

Recent graduates should establish a rainy day fund as soon as possible. Save $1,000 to start — you can add more later as your income and responsibilities increase. This money is for emergencies only. It is not for beer. It is not for shoes. It is not for a Playstation 3. It's to be used when your car dies, or when you break your arm in a touch football game.

Keep this money liquid, but not immediately accessible. Don't tie your emergency fund to a debit card. Don't sabotage your efforts by making it easy to spend the money on non-essentials. Consider opening a high-yield savings account at an online bank. When an emergency arises, you can easily transfer the money to your regular checking account. It'll be there when you need it, but you won't be able to spend it spontaneously.

Think of an emergency fund as self-funded insurance — insurance against Murphy's Law. Whenever you tap into this account, replenish it as soon as possible.

Avoid consumer debt

Now that you're out of school and in the “real world”, you'll be tempted to leap headlong into the American way of life. You'll want the American Dream, and you'll want it now. You'll see the stuff your parents have, and think that you should have the same things.

But your parents didn't start with that stuff. They worked hard to get it. When they graduated from school, they didn't have much either. They were in the same place you are now. The key to avoiding consumer debt is to resist lifestyle inflation as much as possible.

  • Understand the pros and cons of credit cards. If you use them, pay your balances every month. If you can't pay cash for something, don't charge it. A credit card is a convenience, not a license to spend.
  • Don't buy things you cannot afford. Want a new HDTV? Fine. Just don't buy it on credit. Save up for it. You can wait a few months. If you're tempted to buy things simply because you have credit, I urge you to cut up your cards.
  • Don't try to have everything at once. It took your parents decades to get what they have. Take it easy. Get things slowly. Don't adjust your lifestyle upward until you establish the saving habit.

Avoiding debt will put you ahead of your peers right away.

Save for retirement

You may be thinking, “That's crazy! Retirement? I'm 22 years old. I'm not going to retire for 40 or 50 years.” Exactly. That's exactly why you should start saving now.

It doesn't take much. Just $200/month — about $2500/year — is all you need to have a million dollars saved by the time you retire (assuming average returns and inflation). But let's say that you put off saving for retirement. Let's say that you do what I did, and wait until you're 37 years old to begin saving. Assuming average numbers, that 15 year delay will make your money worth only $300,000 at retirement. That, my friends, is the power of compounding.

Setting up a retirement program will never be easier for your than it is now. You're used to frugality. If you simply funnel some of your increased earnings automatically into a Roth IRA, you won't notice a difference in your lifestyle, yet your retirement savings will have an opportunity to grow and grow.

Conclusion

When you find your first job, you're going to be enamored with your new salary. If you've been working for peanuts on campus, $30,000/year (or more!) is going to seem like a lot of cash. You'll be tempted to start spending immediately. This is a dangerous trap. A few years of frugality now can lead to financial freedom in the long run.

The three steps I've described here are easy, but they're important. Most people never do these things. Most people are broke, and they don't know why. You don't have to be one of these people. It takes some effort, but you can acquire wealth. It won't happen overnight. Despite what you might have heard from all the spam e-mail you get, it's not possible to get rich quickly, except by luck. But anyone can get rich slowly — it just takes time, discipline, and smart choices.

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Latro
Latro
13 years ago

I graduated about a year ago and have been doing my best to implement these ideas. I worked my way through school and was lucky enough to graduate with out any student loans. The only loans we have now are for our cars and our house. We’re working to save about $500 each month and motivation and reminders of how important that savings can be is always helpful! Thanks JD!

Michael Hampton, WOU
Michael Hampton, WOU
13 years ago

Great advice JD-

I am sorry it did not work out for you to be able to talk with our graduating students directly. May I put this in a handout form and have available for the students who come into our office?

SJean
SJean
13 years ago

No mention of student loans? Though not as beneficial as a year or two ago (i think rates were as low as 2 or 3%), consolidation can lock you into a lower interest rate and is very important to look into.

Otherwise, solid advice, too bad those who really need it probably aren’t reading GRS! They should make something like this required reading upon graduation.

J.D.
J.D.
13 years ago

No mention of student loans? My knowledge of student loans is woefully inadequate. I didn’t have any loans in college, so have no first-hand experience with them. It’s one of my financial blind spots. I would love to publish a guest article from somebody about this subject. I am sorry it did not work out for you to be able to talk with our graduating students directly. As Michael hints, this article is derived from a talk I had prepared for a local university. I’m frustrated because someplace I have a nearly finished version of this piece that I wrote… Read more »

Andrea >> Become a Consultant
Andrea >> Become a Consultant
13 years ago

I’d go back further than 1991 and talk to JD in high school. I’d tell him to pick up a part-time job and start saving for college. I’d tell him to work summers. I’d tell him to enroll in a college with a co-operative education program and to occasionally work during the school year. I’d tell him to live as cheaply as possible, so that he could come out of school with some money in his wallet. I scrimped and saved to put myself through four years of university. I worked part-time during high school. I worked part-time for three… Read more »

J.D.
J.D.
13 years ago

Good point, Andrea. What’s crazy is that as a high-schooler I knew that I could not afford college, and that my parents could not afford to help. As a result, I worked hard to get scholarships. My work paid off, and I got a full-ride. But in a way, this backfired. I didn’t appreciate the value of the education I was receiving. Because I didn’t pay anything for it, I didn’t have any ownership in it. I did work a lot during college, but it was all for spending money. I held down three jobs at once, but still outspent… Read more »

Don
Don
13 years ago

I wonder if we should stop talking about retirement savings the way we’re tempted to. With some years under our belt we realize just what it means to say “that 15 year delay will make your money worth only $300,000 at retirement.” Those still green around the edges, however, may look at that and just see what it still a near incomprehensible number – $300,000. Maybe we should instead talk about how much the day-to-day costs are to get to that $1M number, and how much more pain is going to be involved in starting at age 35 rather than… Read more »

plonkee
plonkee
13 years ago

Don, I think thats a good idea. Its also an idea to discuss what kind of sacrifices you will need to make if you don’t have anything saved or invested when you retire.

JD – is that you in the picture? Or a 14 yr old dressing up in a graduation gown?

MacKash
MacKash
13 years ago

Hey J.D. I’ve been reading GRS for a few months now.. as a 21 year old working my way through night school, I appriciate all the articles you come out with.. I moved out of my parents house right after highschool and totally plummeted into credit card debt to “survive” in my apartment.. As long as I had room on my credit card, I’d be able to eat that week.. Now that I have a job with a company that offers tuition defferment and a solid 401k plan, I’m struggling to get out of the debt I racked up almost… Read more »

Matt
Matt
13 years ago

It is critical to save for retirement at a young age to take advantage of the power of compounding. However, many students face huge debt when leaving college. Students with large debt should research employers who agree to pay off student loans. This was a great post!

A Tentative Personal Finance Blog
A Tentative Personal Finance Blog
13 years ago

great advice, i’ll try to submit something on student loans. we’ve got 145k in educational debt.

Andrea >> Become a Consultant
Andrea >> Become a Consultant
13 years ago

Yeah, I was in the same boat, JD. I had to pay my way on my own, including my living expenses. But it’s very rare in Canada to get enough scholarships to cover your room & board. (When I graduated, the biggest scholarships were not even enough to cover books and tuition.) So I had to save every penny I had. From what I hear, a full ride in the US means they cover your living expenses, too — is that right?

ChristianPF
ChristianPF
13 years ago

Yea, having an emergency fund is so critical to financial success. I have used it as a means to “self insure” myself. As it grows, you can raise your deductibles on your insurance, which in turn will lower your premiums. Then you can take that extra savings and add it back to the emergency fund. If you continue with this cycle it will do wonders for your net worth.

Danny at Money Socket
Danny at Money Socket
13 years ago

JD This is an excellent post. Theres a big problem with society today with regards to keeping up with the Jones’ and its getting worse with the wide availability of credit. Most of my generation (I’m 23) want to look rich rather than to be patient and eventually become rich. Everyone thinks meeting the monthly minimum is ok and because theres a steady income after college, its much easier to think that way. I’m in my last semester of college and its sad to see that most of my friends don’t see past their nose let alone their financial future..But… Read more »

Rachel May
Rachel May
13 years ago

I think the only thing I would add is about the emergency fund. We (my husband and I) had poor spending habits and no savings habits in college. Afterward, we *tried* to set up a savings account online. We just couldn’t keep from transferring it into our checking account when we had too much month left at the end of our money from eating out too often. So, we went to a credit union and opened a savings account. The teller was floored when we said we didn’t want online access, a debit card, an ATM card, or checks for… Read more »

Don
Don
13 years ago

As far as populating an emergency fund (or any kind of savings) there’s another useful way to do it in addition to what Rachael May said. Many employers who do direct deposit will split the deposit across multiple accounts, either as a percentage or by amount. Mostly it is no hassle for them since the majority of employers who do DD use an agency like Paychex. It’s a phone call or form and they’re done. Setting up to automatically put $50 per check into that What-If account is a do-it-once and forget it kinda thing. I have an automatic debit… Read more »

Jacob
Jacob
13 years ago

Well, I have been reading your blog for a couple months now. Even though most of the information on here is generally good advice for those later in life (or regrets realized later in life), I still enjoy it. I wouldnt mind some kind of advice though on what to do early or previous to attending college. I have been trying to save at least $1000 a year from my 18th birthday every year. Unfortunately I am a little behind with it. I feel kind of stuck I suppose. I know like what I should be doing, but I just… Read more »

KD
KD
13 years ago

Regarding the section on avoiding consumer debt: of course I agree with everything you said about living within your means and avoiding credit card debt. However, as someone who was raised to be extremely frugal and is more than happy to go without, I find myself working my first real job and having the opposite problem – I don’t know when to SPEND money. I have saved almost $25,000 over the last couple years since starting to work, while paying off student loans. I enjoy my low-cost lifestyle, but I would love to read an article how how to decide… Read more »

J.P.
J.P.
13 years ago

J.D., I really wish I’d had this advice 3 years ago when I started working! I decided that the first thing I needed after year of being broke was an iPod, which later begot a newer iPod, a new mobile phone, etc… it just spiraled from there! The idea of saving for retirement, or any type of financial planning for that matter, did not begin to occur to me until a few months ago when I finished my job. To all the young kids out there: I’m nearly 30 now and just getting started with setting myself up financially for… Read more »

Norakism
Norakism
13 years ago

You said the following: “Want a new HDTV? Fine. Just don’t buy it on credit. Save up for it. You can wait a few months.”

How about just not buying an HDTV at all and entertain yourself by reading Get Rich Slowly? Buying the HDTV on credit and buying it by saving up won’t make much difference, i.e. maybe you’ll pay a bit more if you buy it on credit because you have to pay interest, but the big difference is in just not buying it at all.

Liz
Liz
13 years ago

I think the guy who wrote this wrote it from a perspective that is about 10 years out of date. A lot of students, in order to graduate, HAVE to assume consumer debt in order to finance their degree because (especially in Canada) student loans don’t pay for the entire bill of your schooling. //So, it’s not really the graduating JD you needed to reach. It’s the high schooler.// Exactly. Get them before they go into school. Or something. I’ve had interesting experiences with getting my degree, and financing it myself. I’ve spent 6 years getting the degree, working full-time… Read more »

Russell Heimlich
Russell Heimlich
13 years ago

I’m quite the opposite. I’m 22 years old and I was so eager to start my 401(k) at work. Last week was the first time an automatic pretax deduction was taken out and it felt so good. I can’t wait to start tracking my retirement savings and watching it go up and up.

Minimum Wage
Minimum Wage
13 years ago

I’ve worked since I was ten years old (I started shoveling snow around town and got my first paper route when I was twelve). I had saved up $4,000 by the time I graduated high school in 1973 (that’s like $20,000 in today’s dollars).

Then I blew it all on college and graduated into student loan payments and a minimum wage job. Today I still earn minimum wage (in a different state with a higher minimum wage) and still have student loan debt (at 7% which I can’t reduce).

Is there an Old Graduate’s Guide to Financial Freedom?

Sara
Sara
13 years ago

I didn’t finish college because I didn’t want to waste money taking random classes when I had no clue what to get a degree in. The following summer I was lucky enough to get in as a lowly office assistant at a brand name office of financial advisors. The job experience with computers helped me work my way into the health insurance field. Now at 27 I have a job at a great company working alongside many who have 4 yr degrees. The company I work for will reimburse college expenses so now I’m going back to school for a… Read more »

chris
chris
13 years ago

My wife and I finished grad school (phd and law school) when we were 28 so we had a fair amount of student loans but we’ve taken to retirement savings with enthusiasm. Our income isn’t too high given our level of education, but we are relatively frugal but we’ve been able to put in the maximum into Roth ($4000 each) and 401K ($15,000 each). After less than 5 years and a good stock market, we have about $200,000 in retirement savings and are well on our way. Our student loans are also consolidated to around 2.5%.

jos
jos
13 years ago

i wish someone would have given me advise like this straight out of college…. or even when i was in college… i was making close to 30k working FT while going to school FT and i have nothing to show for it… i spend close to $1000 a month on food, money on designer clothes and electronics… i wont even go into what i spent on drinks and ciggs… plus i racked up credit card debt… anyways i am a few years out of college 3 years actaully and i am slowly paying off my debt and planing for the… Read more »

Evan
Evan
13 years ago

J.D.,

This is some excellent advice. I’m eager to jump into investing as a recent college graduate. However, I’m not sure what the best situation for me is. I have about $50,000 in student loans, and after I return to grad school in 2-3 years, that will be 100-150k in student loans by the time I finish. Given this, is it wise to start investing in something like a Roth right away? Or should I wait until I’m completely done with school in 5 years? What would you recommend to someone in my situation?

Thanks

Tyrone Solee
Tyrone Solee
11 years ago

Hello, you can visit my post too on My Path to Financial Freedom.

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