It's that time of year again, when politicians, activists, business honchos and other luminaries don cap and gown to dispense sage advice to newly minted college grads in the time-honored form of commencement speeches. Somehow I didn't receive a request to speak. Maybe my less-than-cum laude record as a student at Penn more than 40 years ago scared schools off. But I've never been one to let the mere lack of an invitation stop me from weighing in. So here, from a geezer who's spent the bulk of his career writing about personal finance, are four tips and observations designed to help recent grads get onto the right financial path.
1. Knowing what you want to do is good; leaving yourself open to many possibilities is even better. For most recent grads, launching a career is priority number one. If you already have a career path in mind—maybe you've known from an early age you want to be the next Mark Zuckerberg, Warren Buffett, Beyoncé or whatever—that's great. But if you're unsure about what you'd like to do, or don't even have a clue, there's no reason to panic. You'll have plenty of time to sort things out.
I know this from personal experience. My first job out of college was working as a commercial credit analyst for a large bank that presumably hired me on the assumption that an econ major would have some practical knowledge of finance. Not true in my case, unless you consider a passing acquaintance with concepts like Ricardo's theory of comparative advantage good preparation for analyzing creditworthiness. In any event, I quickly realized that poring over company balance sheets and income statements didn't set my pulse to racing. But I needed a job, so I stuck it out for a little more than a year.
And you know what? It turned out to be time well spent. Not only did I pick up skills I'd later put to use as a financial journalist, I also learned a lot about how organizations work (or don't work) and, even more important, why you need to be careful about making judgements based on appearances. For example, when I arrived at the bank I assumed I'd learn the most working with the "national" loan officers, the men (and they were men for the most part back then) who wore bespoke pinstripe suits, gleaming wing-tips and dealt with major corporations. They certainly had the highest status. But I soon discovered that it was the less elegantly decked-out "metro" loan officers working with local businesses who often came up with the most creative financing solutions for their clients.
There's nothing wrong with meandering a bit as you gain experience and get a better feel for the kind of work you'll find satisfying. Even if you think you've got your life plotted out with the precision of a spreadsheet, it's still a good idea to leave yourself open to serendipity and chance. As comedian and talk-show host Conan O'Brien told Dartmouth grads in his now-famous 2011 commencement address, "Your path at 22 will not necessarily be your path at 32 or 42. One’s dream is constantly evolving, rising and falling, changing course.” So don't be too quick to pigeon-hole yourself.
2. Saving is essential; budgeting, not so much. One of life's immutable truths is that to have true financial security you have to save. We all should have a cushion of three to six months' worth of living expenses in a bank savings account that we can tap for emergencies or periods between jobs. And we also need to build a nest egg over the course of our careers if we want to maintain an acceptable standard of living in retirement after the paychecks stop. (Yes, I know retirement seems like a far-off mirage at the moment. But, believe me, it creeps up faster than you'd think.)
Question is, what's the best way to ensure you actually will save, as opposed to knowing you should but never quite getting around to it? Most financial experts will tell you the key is to create a budget, preferably by visiting a website or using an app that allows you to slice and dice your spending into dozens of different categories. If you like doing that sort of thing, don't let me stop you. At the end of the day, though, the point of tracking your spending isn't to break your spending down into colorful pie charts. It's to get you to save. And there's a much easier and more effective way to achieve that goal.
How? By doing your saving automatically--say, by enrolling in a company savings plan like a 401(k) or, if such a plan isn't available to you, signing up for a mutual fund company's automatic investing plan that transfers money each month from your checking account to an investment account. The beauty of putting your saving on autopilot is that it forces you to adapt your lifestyle to the income you have left after savings or, to put it another way, to live below your means.
I'd say 10% of pay is a good initial savings target. But if you can't manage that amount, then start at 5% and work your way up gradually to 10%, or more if you can. The point, though, is to get that money saved before you can get your hands on it and spend it (which, given half a chance, most of us will, since our brains are hard-wired for immediate gratification).
3. Most financial advice you hear is self-serving blather you can safely ignore. The message from the financial services industry and most investment pundits is that to be a savvy investor you must stay constantly attuned to the financial markets, spread your money among a staggering array of investments and then be ready to overhaul your portfolio at a moment's notice based on the latest economic data, company earnings release or pronouncement from the Fed. The implication: investing is complicated and you probably shouldn't try this alone, boys and girls.
Nonsense. You don't have to do anything fancy or complex to invest wisely. In fact, simpler is better. By mixing just two low-cost index funds—a total U.S. stock market index fund and a total U.S. bond market index fund—you can get pretty much all the diversification and growth potential you need to grow the value of your savings. If you want to take an extra step and gain exposure to foreign markets, you can throw in a international stock index fund. (For guidance on how to divide your money between stocks and bonds, check out Vanguard's risk tolerance-asset allocation questionnaire, which you can find in the Retirement Investing section of RealDealRetirement's Toolbox.).
If even this straightforward approach seems too daunting, you can always go with a one-fund solution—i.e., invest in a target-date retirement fund, a single fund that gives you a mix of stocks and bonds appropriate for your age that automatically becomes more conservative as you get older.
If you decide you do need help from a pro, make sure you're getting real advice rather than a glorified sales pitch. Recognizing the difference can sometimes be difficult. After all, it's not as if advisors who are more interested in improving their bottom line than yours will divulge this upfront. But by asking the right questions, exercising common sense and maintaining a healthy dose of skepticism, you should be able to get trustworthy advice at a reasonable price.
4. A big account balance isn't the best yardstick for success. The last thing I want to do is underplay the significance of earning a good salary and properly managing your finances. But it's also important to understand that financial success isn't an end in itself. It's a means for us to provide for our families, give us greater freedom to pursue the things we want to do, and ultimately to live more rewarding and satisfying lives. And while you definitely want to devote time and attention to saving, investing and building wealth, you don't want to make it such a single-minded focus that it diminishes your ability to take pleasure in life as you live it.
So by all means take the steps necessary to get and stay on the path that leads to financial security. But also be sure to enjoy yourself along the way.
Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at email@example.com. You can tweet Walter at @RealDealRetire