Graduate to Financial SuccessSo you just graduated college and landed your first big job. Instantly taking you from poor college student living on ramen noodles to a big time high paid employee with great benefits.

I just wouldn’t feel right if I didn’t lay down some advice for you that I’ve learned over the years.

WHAT WOULD I DO IF I JUST GRADUATED COLLEGE

I didn’t follow these steps and learned the slow, hard way. Hindsight, as they say, is always 20/20. Believe it or not, you are in the best possible position to set yourself up for huge financial success and even early retirement if you so choose. Since you’re on the cusp of making many big life changes, you are in a great position to make easy decisions now that will GREATLY impact your future wealth. You can choose to reel in your materialistic desires and tone down to a life that’s still pretty great compared to the college days AND set yourself up for major wealth within a few short years most people spend decades to acquire.

You’ve just instantly went from a low income tax bracket to a high income tax bracket and probably haven’t fully grasped everything that’s changing in your life. Set yourself up financially right now, do these steps and your money will grow quicker than you could imagine.

  1. Setup your company’s 401k or other retirement account to get the company match.
  2. Pay off all credit card debt and any other high interest debt. Pay off any student loans above 6% APR. Student loans are tax deductible even if you take a standard deduction each year. So that 6% interest is more like 4.5% after taxes. Refrain from going out to eat or partying too much until these are paid off, these debts are a financial emergency.
  3. Max out a Traditional or Roth IRA, currently $5500 per year, through Vanguard or similar and pull $458 out of your check per month.
  4. Max out your 401k or other company retirement account and pick only basic index funds with low expense ratios. Put that on autopilot and pull $1500 per month out of your paycheck. I know that sounds like a lot but this will knock off some of your high tax bracket income so you’ll see less than $1500 come out of your check.
  5. Any money left over You have a choice, either pay off student debts or any other low interest debts you have left or invest in taxable accounts through Vanguard or similar.

Someone who follows this will quickly find themselves handsomely wealthy within 5 years(show graph)

Graduate to Financial Success

5 years of maxing out retirement accounts. 7% return expected

In 5 years you could have nearly $150k just from maximizing your retirement accounts.

Housing

I know you may want to upgrade your home, but honestly, if you’re still happy with your living arrangement, DON’T CHANGE IT!

If you’re unhappy living with your parents or roommates you can upgrade. Try to keep your housing down. Something you’re happy with but try not to go over the top. Any extra cash you throw at your housing will cause several extra years of needed employment.

If you’re already considering buying a home, understand that owning is often not the better financial choice and do you research before you buy.

Car

Fight the urge to buy a new fancy car. keep your current car until you’ve built up some emergency cash, then look on craigslist for a well maintained 5 to 10 year old car like a Honda Civic or Toyota Matrix with low(80,000 – 120000) miles. General rule is to figure out how many miles you will drive per year and multiply by 10. subtract that number from 200,000 miles and find a car with that many miles or less. Do quick researches into a car’s reliability to find out if it has any major transmission or engine issues.

Why should I be so extreme at saving?

You’re building wealth and it has some serious F-You financial power. It puts you at serious advantage for negotiating anything in life, including even higher pay and the ability to do what you’re really passionate about, do what you’ve always wanted to without fear of losing financial stability. That power can easily be there for you within a couple years if you plan right, so plan it now.

The other reason you want to build up as much as you can now is because of the power of compounding interest and I’ll demonstrate the power with a graph.

Graduate to Financial Success

Expected average rate of return: 7%

Both lines show a total principle added of $21000 over 20 years. The red, strong start line, shows $1050 added every year while the blue, weak start line, shows $100 added in year one, $200 in year 2, $300 in year 3 etc. Years 11 – 20 you’re putting more money in per year in the blue line than the red line but the power of compounding interest has taken over and you end up an extra $10k wealthier at the end of 20 years when you invested more in the beginning.

How much do I need to retire, what’s my goal?

You need 25 times your annual spending in investments before you have enough to retire(4% rule). This is another reason why reducing expenses can be so powerful, you increase you savings while also bringing your retirement goal closer, it’s a double win.

Example:

If you spend $20000 per year, you will need $500,000 in investments and you can be done working in about 13 years if you only max out your retirement accounts. No one needs to work till they’re 60 unless they really want to, it just takes planning and determination.

 

How fast you can achieve financial independence depends on your saving to expense ratio. Obviously the more you save the quicker you can retire. If you save and invest 50% of your pay, you can be done working in 15 years.

Graduate to Financial Success

Percent of saved income invested in the market with 7% annual return using the 4% rule. Years rounded up.

Does this shit sound awesome? Feel free to ask questions and start researching.

 

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13 comments on “Graduate to Financial Success

  • Great post. Great! I’m glad I’m reading stuff like this not too far out of college. I think it will make a huge difference. It is frustrating since I’m finally investing, but the market hasnt made great returns the past 10 months or so. But the way I see it, I’m buying low. And after 5 years, I hope I’ll be surprised and thanking myself that I lived simply and invested while I could. I like these charts, especially the 5 years of maxing out. You know what I would like to see? What if you max out IRA and 401k for 5 years by the time you’re 30 and then stop. Would the compound interest just put it in ‘auto’ mode? And I can be comfortable with making the leap into my own venture? One graph online said if you do that scenario, by the time you’re 60, it will be $1 mil. Not sure how much I believe that though. Thoughts?
    AB recently posted…Eat Like a Dog: The $1 Power Oatmeal RecipeMy Profile

    • As far as investing in the market is concerned, you can’t really look at gains or losses over a year, it needs to be over 10+ years that you’ll start to see the 7-8% average. Right now as you’re building wealth instead of thinking of the market in terms of what it can return soon, just think of it as buying pieces of companies. You’re a small percent, multi business owner without the headache. And I agree you should think to buy more when the market is low rather than her scared and pull out.
      I can run any scenario you want. I’ll need a little more specifics, are you asking what happens if you max the accounts for 5 years then stop and let compound interest take over? Any money left to its own devices in the market should on average double every 10 years. 1,2,4,8,16,32,64 (starting to see the power of compounding interest? ).

  • These are largely the steps I took right out of college. I wish I had done a bit more in certain areas (more to the 401k) or less (not bought that car) but overall I’m happy with how its gone. As your income level starts to compound it gets a lot easier as well.
    Adam @ AdamChudy.com recently posted…2015 Q2 ReviewMy Profile

    • I may have not followed a lot of these steps right away, but after college it took me a couple months just to find a low paying job. I’ve jumped jobs and doubled my pay, still on the low pay end, in an engineering field over 4 years now since I graduated. I did keep my cheap car from college and rented low cost apartments. It’s more recently I’m putting all these pieces to work.

  • I did something similar when I got out of university, wish I can do a bit more in some of these areas. It’s very important to start your financial life on the right step when you get out of university. Too many ppl get out of university and just party for years. What a waste!
    Tawcan recently posted…Another reason to be financially independentMy Profile

    • Probably helps I’m not the biggest partier and when I do party it’s usually at a friend’s house or mine. It’s important to start on the right foot but it’s also never too late to start and get on that quick path to retirement. I’m having a hard time getting that through to one of my best friends.

  • Great post that touches on two of my favorite personal finance themes: the power of compound interest and choices. The earlier an individual can begin leveraging the power of time and compound interest the sooner they can put themselves into a position to secure their financial independence which equates to choices. The individual that effectively manages their money creates opportunities and multiplies their choices, while the individual that does not … .
    SavvyJames recently posted…Living Frugally: Getting Off Track – It Happens to All of UsMy Profile

    • The individual that does not shot themselves in the foot when their company they were with for many years gets bought out and their position was determined to be obsolete leaving them to scramble for low pay jobs to make ends meet.
      I think people don’t really believe just how many doors will actually open for them by just managing their money, it’s extremely powerful and floods you with choices like you said.

  • Great post! I started that journey exactly 3 years ago 🙂 I was lucky enough to be guided away from the pitfalls of graduating college and getting that first job (although I still made a lot of mistakes!) This type of information needs to be mandatory as your last class before graduation!

    Every stage of life has similar issues as your transition from one to the other. As a new parent, I’m finding that our really quick! 🙂
    Luke Fitzgerald @ FinanciallyFitz recently posted…The Costs of Not Understanding Opportunity CostsMy Profile

    • When I started learning about investing I really did get pissed that it’s not a standard maybe even prerequisite class in high school/college.
      If I become a dad one day, I’ve already been planning out cloth diapers and such. I actually used to wash cloth diapers for a retirement home in high school. Not a great job but pay was decent, I was always surprised how clean the diapers always came out and how jam packed overloaded the washers would be. 4 years after college now some of my work is in the waste water industry. Just can’t get away from the poo.
      You’ll have to write some tips to start out on the right foot financially as a new parents.

    • Thanks :), I appreciate you stopping by, I do love letting the math do the talking when it comes to financial planning. I plan to convert more and more people and hope the math and graphs speak as loudly to them as they do to me.

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