Roughly 1.6 million college students will graduate with bachelor's degrees this spring as the class of 2014. As commencement season continues, chances are pretty good that you or someone you know will have attended at least one graduation ceremony.
College graduations usually feature well-known speakers charged with imparting wisdom to young graduates. "reach for the stars" and "never stop working for your dreams," are typical pieces of advice doled out to young people entering the "real world" for the first time.
If you know a new graduate, do them a favor: Steal five minutes of their time to disclose some real wisdom -- in other words, the commencement speech they really need to hear. Be sure to touch on three big points:
1. Start saving for retirement immediately. Not next year or in five years -- now. If you're lucky enough to graduate with a job offer in hand, begin by signing up to participate in your first employer-sponsored retirement plan. New graduates probably don't enter their careers already thinking of retirement. Saving now for an event taking place in 40 plus years is a tough sell, but there are two important details new graduates should understand:
-- People who start saving sooner rather than later set themselves up for financial success. Even a 20-something has likely had a fleeting thought about retirement, even if only to assume it will happen someday. Tell them they have an advantage in the planning game with the benefits of compounding interest -- the ability of an investment's earnings to themselves earn a return -- on their side. In fact, a 22-year-old that starts investing $2,000 per year and only invests until age 36 will have over $300,000 more in their nest egg than someone who begins investing the same amount at age 36 until age 65 thanks to the power of compounding.
-- Saving can be really easy if they automate the process now. A new graduate can get away with starting small -- even 1 percent of his or her salary can make a difference-- and increasing their contributions over time. Those little amounts do add up and before they know it, he or she will be contributing 10 to 15 percent of their salaries -- or maybe even the maximum allowed by the Internal Revenue Service.
2. Invest aggressively. With 40 plus years until retirement, it's okay for new graduates to be aggressive with their investment choices. Of course, as a new investor they should take care to remain well-diversified and make choices based on their tolerance for risk and personal goals, but selecting a riskier portfolio of mutual funds can be a good way to make more money as a young investor.
Generally, riskier investments, such as equities, have more ups and downs than funds that come with reduced risk (i.e. bonds). But they also have a greater chance of earning higher returns. People close to retirement should limit their exposure to volatility because they may not have enough time to wait for losses to rebound, but a new college graduate has no such worry.
3. Save as much as you can and pay yourself first. Bad things happen to everyone. Whether faced with an illness that takes one away from a job for a few months, or one loses a job, new graduates may one day find themselves without a steady income with which to pay the monthly bills. Their savings account could be the difference between sinking and staying afloat. That's where "pay yourself first" comes in -- while they're young and healthy, tell them to make it a priority to save for retirement and sock away emergency funds to deal with situations such as these.
Advise your new graduate to think of their savings account as a cushion. It will figuratively "cushion" financial falls they may experience later in life. So before they eat out, buy concert tickets, get a new outfit, they should pay themselves.
This means regularly contributing to a savings account separate from their retirement plan. Like their 401(k) contributions, advise them to make it automatic and have their human resources department automatically deposit money from their paycheck into a savings account. When they get a raise or earn bonuses, earmark some those funds for their savings and retirement accounts. Trust me, they'll thank themselves later.
New graduates are dealing with a flurry of emotions -- elation at finally being done with their undergraduate degree, excitement at starting their first job and fear of the unknown, to name a few. When it comes to their finances, they've got two choices: Take charge and create a solid foundation for a financial future now, or put it off and potentially leave themselves open to struggling later. With these pieces of advice, you can help them make the right decision.
Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.
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