Tales from the Wallet: Personal Finance Advice for New Grads
What personal finance advice would you give to new grads? We've shared some of our best personal finance tips before (including our money roadmap so that you know what to do and when to do it) and just recently rounded up the best personal finance resources for professionals, but I don’t think we’ve specifically talked about personal finance advice for new grads in a looong time.
Most of this advice is geared toward people in their early 20s, although of course graduates can be all ages — where it matters from a compound interest/time standpoint, I've tried to be more specific.
Readers, what personal finance advice did you receive when you graduated? What would be the best advice you'd share with new grads now? (Are there things you didn't start doing until later that you WISH you'd done early on?)
My Best Personal Finance Advice for New Grads
Where You Live is a HUGE Money Decision
Whether you live with roommates or by yourself, in the trendy part of town or in a more affordable, safe-but-not-trendy part of town, where you live is one of the biggest money decisions you can make. It can have a huge impact on savings — particularly because this ONE decision repeats every month until you decide it's time to move. (Moving often can also be a huge expense, especially if broker fees are involved.)
Go as austere as possible, because even throwing an extra $100 a month towards debt, retirement, and investments can have HUUUUUGE payoffs if you start early. Be safe in your apartment. Be comfortable. But you don’t need anything “fancy” right now.
Build a Cushion
If you don't have $1,000 in savings as a cushion every month, that should be your first goal before you do most of anything else beyond paying your monthly minimums for any loans or credit card debt. (I'd still pay an extra $5 towards credit card debt if you have it.) After that, you might want to start building a cushion that would cover your expenses for three months.
Whether you think of it as an “F Off fund,” or an emergency fund, you never know when you'll need it.
{related: where to keep your emergency fund}
Assess Your Debt
If you have credit card debt, get out of it as soon as possible — and go above and beyond to do so, because it can spiral out of control really quickly. (This is one of our first steps on our money roadmap!) Can you get a second job or work a side hustle (if that's allowed at your workplace)? Even regularly babysitting one weekend night could help a bit.
If you have student loans, pay your minimum every month, but also make a plan. Make a list of all your loans, and assess which has the highest interest with the lowest amount due. Then, focus on throwing extra money at that loan every single month. Can you round your payment up to the nearest $100? To the nearest $1,000? If you look on your loan provider's website you can probably find something about “extra principal payment” to get the technical details of how to do it. If there's a way to automate that extra principal payment, take it — you can still send a big check once or twice a year as circumstances allow (such as bonuses).
After the first one is paid off, take the full amount you were paying toward THAT loan and put it toward the next loan with the highest interest.
(After some Googling, I learned that my advice is apparently a melding of the two debt reduction strategies: the “debt snowball” (picking the lowest dollar amount loan to pay off first) and the “debt avalanche” (picking the highest interest loan to pay off first, even if it's a huge dollar amount).)
{related: paying down debt vs saving}
Start Saving for Retirement
If you are a full employee, with benefits, you'll probably have access to retirement savings, such as a 401K. The big questions to ask your HR department are 1) “When can I start contributing to the 401K?” and 2) “Is there a company match?” There might be a 3–6 month period before you can start investing — and if there is a company match, you should do everything in your power to AT LEAST invest that amount each year, because your company is essentially doubling your investment, for free.
If there is NOT a match (or you have extra money to invest), you may also want to look at a Roth IRA. (I once helped a friend set up her Roth IRA in 45 minutes.) A Roth IRA is great because you can take the money you’ve put into it (principal only, not interest) and withdraw it without penalty, at any time, for any reason, including a down payment or wedding or tuition if you go back to school.
In general, if you're young, once you’ve got your money in a retirement vehicle, go for either a) an index fund that matches the market, or 2) an “aggressive” portfolio. You can change these later, but if you're like me and suffer from decision fatigue, in broad strokes, those are the ones you want.
Further Personal Finance Advice for New Grads: Bonus Points
Honestly, if you can do the above stuff you are far more of a rockstar than I was, even by my late 20s. You’re working really hard, so HUGE props to you.
But… if you want to do more, there’s always more. I might suggest thinking about the big purchases and expenditures you’ll want to make in the next 5–10 years.
For example, if you’re considering going back to school one day (I’d say 75–100% sure), you might want to look into our post on how you can use 529s for yourself, and save a bit towards that — the money won’t be taxed, and it will grow in the market.
If you’re thinking about paying for your wedding or civil union — or making a down payment on a home — you might want to check out our post on different savings vehicles and what you can withdraw and how and when. (For some retirement accounts, for example, you can't touch the money, without penalty, until you're 59 — so they're not great for saving for things like down payments and weddings.)
If you want to travel or make a few big purchases (for example, a couch), you might want to check out our post on how to automate your savings, and set up buckets that are earmarked for different expenses.
And if you’re just not sure what you want to do — and you don’t have credit card debt, and you’re maxing out your retirement contributions — consider investing in index funds. If you can meet the minimum investment, then I highly recommend setting up a small, automatic investment into an index fund — $100 a month can have a huge impact. You can do baby investments with apps like Acorns (they round up your purchases and invest the extra), but be wary of the high fees associated with those accounts.
Readers, what is your best personal finance advice for new grads?
Sorry for a TJ but I need to vent. Roommate is a Loud Talker. Walls are cardboard? Cheap rental housing. I try to tune out, but am not on calls much. Just computer work. Roommate is on calls all the d*mn day. I mentioned that everyone can hear his side of the calls, even though he uses headphones. Probably neighbors on the other side. And that maybe he’d want to take important calls elsewhere because I am going to be on an overlapping call. So huffy! So annoyed! Dude — you have been in my headspace for > 1 year even in your room with the door closed. I know you are on calls and I’ve dealt with it but if you don’t want to be in Above the Law, maybe you’d consider your very broad audience giving you a warning. So sick of this. [I’ve been working in my bedroom b/c common spaces are even louder. Time to scream into a pillow and get on with my day.] And I’ve been the one doing calls in my car sometimes when I feel like it is just too loud at home. Grrrr!
OP on this: to be back on track with the discussion (and even though I vented about it): get roommates. They are a necessary evil (that the pandemic ran roughshod over). But paying rent on your own is crazy in any big city, so avoid like the plague. Seriously, I am so annoyed right now, but will never be so annoyed that I pay all of the rent + utilities on my own.
How annoying! I’ve done a lot of moving so I’ve lived with every kind of quirky to just plain bad roommate over the years. Including my current one who is also my husband… They are a necessary evil like you said. But there’s always something unique and interesting about each one that will drive me bonkers :) Hang in there!
In all seriousness:
http://www.davidclarkcompany.com/hearing.php
I bought a pair last summer and it has made all the difference in being able to hear myself think.
Beyond that already stated, track your spending. I like to use personal capital to keep an eye on things during the month, but when I know I need to dial it in, I like to download the csv file of my spending into a spreadsheet and classify it there. How you categorize it isn’t nearly as important of feeling your reaction to the money spent. A month later, can you remember what you bought? Did you pick up great groceries, but still proceed to pick up take out too often? Are you using that subscription as much as you thought? Can you see any trends or progress you’d like to make after looking at the last three months of data? How about your year to date?
Agree with tracking spending. I love You Need a Budget/YNAB for helping with this, and planning out my budget too.
Agree. I’ve been tracking spending for more than 20 years and the fun part is that if you have it in a digital file, it becomes a diary of your life: “When did we get the new roof/go to Seoul/have to pay that huge tax bill?” “Let me check my MS Money file and see!” (Yes Microsoft doesn’t support Money any more but that’s what I started with and I still use it!)
Live like a student as long as you can tolerate; expect a recession to happen. If it doesn’t, be happy and enjoy your savings and the career you built. If it does happen, you will be happy to have been prepared.
When starting a new job after the end of an academic calendar, remember that the 401k limit is per year. If you start a job in July after finishing a degree, there is no reason you can’t divert a larger portion of your paycheck into the 401k and still max out for the year by December. (Caveat: some employers may have caps on the amount of a given paycheck you can divert, but these are relatively less common.) I just happily set my paycheck deduction to max out on an annualized basis once in that situation when I definitely could have afforded to still hit the annual limit in the ~half year.
If your 401k isn’t matched, this would also be a great time to do a ROTH, if annual income limits would get in the way (I know there is the back-door ROTH, but people tend to do things that are easy vs things that require more steps).
Contribute to a Roth IRA and don’t eat out a lot.
Start maxing out your 401k/retirement plan or if you can’t do 19.5k on a starting salary, do absolutely as much as you can (yes even going beyond whatever match you may have). It sounds dumb now at 22 but at 40 you will be so happy you aren’t playing catch up while dealing with the expenses that come later in life.
Start a brokerage account as soon as you can — it can mimic your 401k in that it can be in passive S&P indices. You don’t need to do anything exciting with it. Again it’s something you’ll be really happy to have at 30 or 40 and you never know what you’ll need it or use it for — down payment on a house; FU money if you’re in an awful job at some point; start thinking about early retiring in your 50s; buying a business etc. Possibilities are endless but there are more possibilities if you save. And even if putting 2k or 5k in here or there seems like nothing, in 10 years it adds up.
(1) Track your spending
(2) Save save save.
(3) Personal finance is about having good, sustainable habits around money. No one gets it 100% right 100% of the time.
If you can afford it, fund a Roth IRA in addition to maxing out your 401k.
For early jobs, choose the ones where you will learn the most / have good teachers and not necessarily the jobs that pay the most. Get the better paying jobs later.
Don’t go to law school because you don’t know what else to do.
Kat is so right… where you live has a huge impact on your ability to save money. This holds true throughout your career, not just at the beginning. A house impacts so many other expenses — utilities, property taxes, furniture / decor, maintenance, insurance, etc.
Don’t equate wealth with possessions. A person who has a really nice house and car probably has a lot of debt, too!
Turn off the lights when you are not in the room! Turn off your computer at night. Seriously, utility bills can add up to a lot.
Buy used cars that have a reputation for being reliable.
People are living a lot longer these days as healthcare continues to improve. You may have to work until you are 80, but society can be pretty ageist especially once you get to age 50. The earlier you can start saving for retirement, the better off you will be.
If your job is not onerous, get a second job. You have so much energy in your twenties; taking a second job or starting a side hustle is a great way to pile up money. “Only” an extra $200 a week means $10k a year, done for five years is a down payment on a house.
If you’re thinking about grad school, I want to echo the 529 advice to start saving now (or if you’re not 100% set on it, save outside of a 529). In addition to that, see if your current employer or competitors will pay for any or part of grad school and strongly consider the program that gives you the biggest scholarship, if any, over the highest ranked program as long as employment opportunities for your field are still similar. I just graduated from a 3 year graduate program with a net worth higher than when I started (my scholarship covered tuition and a stipend for the first 2 years, I ended my lease and moved in with parents during COVID though I realize not everyone has access to that option, and kept an unsteady but existent income by TA-ing and babysitting pre-COVID, currently do some tutoring but mostly enjoying funemployment before moving to my FT job in July). I am not wealthy (yet), but opting out of the Ivies and 6-figure loans for my graduate education has put me financially way ahead of my peers. I don’t have the fancy diploma, but I do have a downpayment ready to go at age 28.