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.
- Setup your company’s 401k or other retirement account to get the company match.
- 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.
- Max out a Traditional or Roth IRA, currently $5500 per year, through Vanguard or similar and pull $458 out of your check per month.
- 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.
- 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)
In 5 years you could have nearly $150k just from maximizing your retirement accounts.
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.
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.
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.
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.
Does this shit sound awesome? Feel free to ask questions and start researching.