What are your early financial tips? Should I start a 401K
An ADP Retirement service broker dealer connected to an office I'm interning at came to talk to the employees that have been here for a while about a simple IRA which had been set up for them.
Are there any financial tips you can give, both short-term and long-term, for a college student/graduate?
9 comments
I have surpassed a lot of my peers who have made significantly more than me in net worth & possibly net happiness. Here's how:
1) Maximize your employee 401K benefits - This has been stated before but 401k matching is tax sheltered and more importantly, is free money from your employeer
2) Treat your credit card like a debit card - Never carry a balance, never use it to buy things you don't have savings to buy.
3) Carry cash assets in high yield savings accounts - While interest rates currently, suck, there is no reason to let your money sit in a non-interest bearing account.
4) Avoid paying tax on income as much as possible - There are a lot of financial instruments (401K, IRA) that allow you to defer tax. If you are in a state with significant tax rates (i.e. California) deferring tax can hugely valuable.
5) Learn how to financially model - This is probably my most valuable tip. You should understand the implications of every significant expenditure you make. Since I love modeling, I go a bit overboard on this but it really makes your decisions a lot more clearer. Some typical decisions that you should be able to model with a DCF: competing job offers, buying vs. renting, going to grad school, etc.
6) Financially model & think heavily before going to graduate school. As you hit the mid to late 20s, you may feel a lot of pressure to go grad school due to changing careers, getting pedigree, peer pressure, etc. Higher education in the US is extremely expensive; make sure you model the costs (including the lost opportunity cost of salary) before cutting a check. I've had a lot of colleagues waste money on MBAs that were largely un-necessary. There are also a lot of ways to switch careers without another degree (I did it myself 3 times without any new degree).
7) If you are open to working outside of the US, consider working for a few years in countries like Dubai where you can legally reduce your tax payments. A reduction in your taxes can easily double or triple your take home salary (even if your salary stays the same or even reduces). This benefit erodes as your salary increases so consider this in early stages of your career (it also becomes harder to move internationally as you grow older).
8)Negotiate every salary offer, ideally with competing offers, even if the offer is your dream job. Most people stop looking for jobs when they are close to the offer. What do I do? I accelerate my interview process and reach out to competitors to see if I can get competing offers before I have to decide on the offer. No good company will fault you for negotiating your offer and negotiation almost always improves your offer significantly.
9) When comparing & contrasting offers in different cities consider your "savings income": i.e. pay - taxes - living expenses. Some people instead rely on cost of living which results in incorrect decisions (a 50% increase in cost of living doesn't mean you need 50% higher in salary to net the same money).
10) Choose credit cards that give you the highest cashback (usually). This isn't always the right choice (i.e. if you fly a lot mile cards may be better) but in most cases 2% cashback card will beat out any card and cash is conveniently liquid (unlike miles). Also don't open more than a few cards as that will just open you to risk, abuse, and a lower credit score. Do NOT open a credit card just to get a free t-shirt or $40 off a purchase. My rule of thumb is that a credit card should return at least $300 annually (not just the first year).
11) Try to allocate expenditure on your "happiness ROI". I am extremely frugal on things that do not improve my happiness for the long term and relatively extravagant on things that do.
Things worth splurging money on [for me]: Experiences & travel, reducing commute time, fitness activities, books, a comfortable bed Things probably not worth splurging on [for me]: Fancy & shiny new car, a bigger apartment/house, expensive new furniture, expensive non-work clothes
As you get older you will feel a lot of peer pressure to buy the things your peers are buying - don't cave in and focus your discretionary spend on things that make you happy.
12) Keep your cost of living relatively stable when your income spikes. You are likely to experience a income spike sometime in your career. Resist the urge to scale up your spending immediately - unless you were unhappy before (and purchases make you happy), what's the point? You will thank yourself when you experience the other common salary spike across most careers: lay-offs.
13) Build 6 months of runaway as soon as possible. Ideally this should happen within few years of graduating (assuming no loans). Extend the runaway as your career progresses and esp. if you want to be become an entrepreneur.
14) Depreciation is your friend - consider buying used when it makes sense. Many items lose significant value within a few months even though they have the relatively same value to you. Purchasing used makes a lot of sense in many purchase decisions (books, cars, furniture) but also makes no sense in other decisions (mattresses, bike helmets, swimsuits, car seats).
15) Advanced tip - Make sure you read the Intelligent Investor. Chances are you've been brainwashed with way too much EMH theory in undergrad which has convinced you that you can't pick undervalued stocks because the market prices everything perfectly. This book will teach you the flip side of the coin - the side that guys like Buffet made billions with. Even if you don't want to invest in stocks or mutual funds, it will give you the right philosophy for financial decisions.
1) Maximize your employee 401K benefits - This has been stated before but 401k matching is tax sheltered and more importantly, is free money from your employeer
2) Treat your credit card like a debit card - Never carry a balance, never use it to buy things you don't have savings to buy.
3) Carry cash assets in high yield savings accounts - While interest rates currently, suck, there is no reason to let your money sit in a non-interest bearing account.
4) Avoid paying tax on income as much as possible - There are a lot of financial instruments (401K, IRA) that allow you to defer tax. If you are in a state with significant tax rates (i.e. California) deferring tax can hugely valuable.
5) Learn how to financially model - This is probably my most valuable tip. You should understand the implications of every significant expenditure you make. Since I love modeling, I go a bit overboard on this but it really makes your decisions a lot more clearer. Some typical decisions that you should be able to model with a DCF: competing job offers, buying vs. renting, going to grad school, etc.
6) Financially model & think heavily before going to graduate school. As you hit the mid to late 20s, you may feel a lot of pressure to go grad school due to changing careers, getting pedigree, peer pressure, etc. Higher education in the US is extremely expensive; make sure you model the costs (including the lost opportunity cost of salary) before cutting a check. I've had a lot of colleagues waste money on MBAs that were largely un-necessary. There are also a lot of ways to switch careers without another degree (I did it myself 3 times without any new degree).
7) If you are open to working outside of the US, consider working for a few years in countries like Dubai where you can legally reduce your tax payments. A reduction in your taxes can easily double or triple your take home salary (even if your salary stays the same or even reduces). This benefit erodes as your salary increases so consider this in early stages of your career (it also becomes harder to move internationally as you grow older).
8)Negotiate every salary offer, ideally with competing offers, even if the offer is your dream job. Most people stop looking for jobs when they are close to the offer. What do I do? I accelerate my interview process and reach out to competitors to see if I can get competing offers before I have to decide on the offer. No good company will fault you for negotiating your offer and negotiation almost always improves your offer significantly.
9) When comparing & contrasting offers in different cities consider your "savings income": i.e. pay - taxes - living expenses. Some people instead rely on cost of living which results in incorrect decisions (a 50% increase in cost of living doesn't mean you need 50% higher in salary to net the same money).
10) Choose credit cards that give you the highest cashback (usually). This isn't always the right choice (i.e. if you fly a lot mile cards may be better) but in most cases 2% cashback card will beat out any card and cash is conveniently liquid (unlike miles). Also don't open more than a few cards as that will just open you to risk, abuse, and a lower credit score. Do NOT open a credit card just to get a free t-shirt or $40 off a purchase. My rule of thumb is that a credit card should return at least $300 annually (not just the first year).
11) Try to allocate expenditure on your "happiness ROI". I am extremely frugal on things that do not improve my happiness for the long term and relatively extravagant on things that do.
Things worth splurging money on [for me]: Experiences & travel, reducing commute time, fitness activities, books, a comfortable bed Things probably not worth splurging on [for me]: Fancy & shiny new car, a bigger apartment/house, expensive new furniture, expensive non-work clothes
As you get older you will feel a lot of peer pressure to buy the things your peers are buying - don't cave in and focus your discretionary spend on things that make you happy.
12) Keep your cost of living relatively stable when your income spikes. You are likely to experience a income spike sometime in your career. Resist the urge to scale up your spending immediately - unless you were unhappy before (and purchases make you happy), what's the point? You will thank yourself when you experience the other common salary spike across most careers: lay-offs.
13) Build 6 months of runaway as soon as possible. Ideally this should happen within few years of graduating (assuming no loans). Extend the runaway as your career progresses and esp. if you want to be become an entrepreneur.
14) Depreciation is your friend - consider buying used when it makes sense. Many items lose significant value within a few months even though they have the relatively same value to you. Purchasing used makes a lot of sense in many purchase decisions (books, cars, furniture) but also makes no sense in other decisions (mattresses, bike helmets, swimsuits, car seats).
15) Advanced tip - Make sure you read the Intelligent Investor. Chances are you've been brainwashed with way too much EMH theory in undergrad which has convinced you that you can't pick undervalued stocks because the market prices everything perfectly. This book will teach you the flip side of the coin - the side that guys like Buffet made billions with. Even if you don't want to invest in stocks or mutual funds, it will give you the right philosophy for financial decisions.
My first internship offered a 401k with company match. The trick for that is to put in exactly as much to get the company "free" money. If they match 100% up to the first 3% of your salary, you just got a 3% raise so long as you agree to put your money in a 401k. If you ever leave, then you'll just roll the account over. Not all of that money could be yours (read the vesting rules), but a good chunk of it probably will be. At worst, did you miss 3% of your salary? You'll get it back in 40 years.
After that point, you're going to get wildly different ideas of how to save your money. Most commonly people will suggest high risk, high return assets (stocks or stock funds, as opposed to bonds or bond-based mutual funds), since even if you lose everything, then you still have the rest of your life ahead of you. Basically what it comes down to is how to compound your earnings combined with the tax burden. Each of these have different rules as to maximum contributions per year, when you can take your money out, etc.
* Traditional 401k or IRA - Pre tax money, lowers your income taxes now in favor of paying tax later (you suspect your tax rate will decrease -- probably not true as a student)
* Roth 401k or IRA - Post tax money. Pay tax now, and none later (you suspect your taxes will go up)
* Brokerage accounts - Pay taxes on gains as income or capital gains (most tax, most liquidity).
Within each of these you can choose how to invest your money for your risk/reward tolerance. Bonds, Funds, and Stocks are how most people invest. Some choose to do real estate. Some choose to do more riskier things like derivatives. Wikipedia has a full list (http://en.wikipedia.org/wiki/Financial_market).
So long as you diversify, you should get an overall good return and won't be subject to volatility in one particular investment. However, due to minimum investments for the first few years it's probably best to diversify over time, rather than right from the beginning.
I graduated 2 years ago, so I've had to brush up on all of this stuff, along with supplemental benefits like AD&D, life insurance, etc. If you have any questions my email is in my profile.
After that point, you're going to get wildly different ideas of how to save your money. Most commonly people will suggest high risk, high return assets (stocks or stock funds, as opposed to bonds or bond-based mutual funds), since even if you lose everything, then you still have the rest of your life ahead of you. Basically what it comes down to is how to compound your earnings combined with the tax burden. Each of these have different rules as to maximum contributions per year, when you can take your money out, etc.
* Traditional 401k or IRA - Pre tax money, lowers your income taxes now in favor of paying tax later (you suspect your tax rate will decrease -- probably not true as a student)
* Roth 401k or IRA - Post tax money. Pay tax now, and none later (you suspect your taxes will go up)
* Brokerage accounts - Pay taxes on gains as income or capital gains (most tax, most liquidity).
Within each of these you can choose how to invest your money for your risk/reward tolerance. Bonds, Funds, and Stocks are how most people invest. Some choose to do real estate. Some choose to do more riskier things like derivatives. Wikipedia has a full list (http://en.wikipedia.org/wiki/Financial_market).
So long as you diversify, you should get an overall good return and won't be subject to volatility in one particular investment. However, due to minimum investments for the first few years it's probably best to diversify over time, rather than right from the beginning.
I graduated 2 years ago, so I've had to brush up on all of this stuff, along with supplemental benefits like AD&D, life insurance, etc. If you have any questions my email is in my profile.
+1 for good advice about matching, vesting, and diversifying.
Here is a postcard cheat-sheet of "what to do with your money," per the OP's request:
1) Pay down credit cards and never carry a balance.
2) Keep 3-6 months' worth of income in a savings account for emergencies.
3) Invest in your 401k up to company match. Put everything in a TSM or SP500 index fund and forget about it.
4) Pay down mortgage, car payments, student loans.
5) If you still have any money, talk to an accountant for investment advice. 401k, IRA, etc are good options.
6) Invest for the future, and live a full life in the present!
Here is a postcard cheat-sheet of "what to do with your money," per the OP's request:
1) Pay down credit cards and never carry a balance.
2) Keep 3-6 months' worth of income in a savings account for emergencies.
3) Invest in your 401k up to company match. Put everything in a TSM or SP500 index fund and forget about it.
4) Pay down mortgage, car payments, student loans.
5) If you still have any money, talk to an accountant for investment advice. 401k, IRA, etc are good options.
6) Invest for the future, and live a full life in the present!
>> Roth 401k or IRA - Post tax money. Pay tax now, and none later (you suspect your taxes will go up)
This is a really good point. I pretty much expect taxes will go up for everyone at some point so it seems like it's a no-brainer to open a roth IRA now. I have never heard of a Roth 401k though.
This is a really good point. I pretty much expect taxes will go up for everyone at some point so it seems like it's a no-brainer to open a roth IRA now. I have never heard of a Roth 401k though.
First, one of my coworkers who will be retiring within the next 10 years recently attended a retirement seminar provided by our company. He mentioned to me that the seminar speaker said that it should be young people going to these, because by the time you are 50, it's too late to make the changes which will have the biggest financial impacts on your retirement.
I don't know what the future will hold, so I am maxing out my TSP (Thrift Savings Plan for US federal employees, like a 401k). I even front-load it, paying as much as I can in the first couple of months of the year, and leaving it at 5% for the rest of the year to get all the matching funds I can. By front-loading, the interest has more principle to compound for the rest of the year. I've also found several TSP websites where people get together to discus ways on maxing their retirement savings. I imagine there might be similar websites for people with 401k plans if you look.
Because I'm at sea and have almost no expenses, I'm investing almost all of my paychecks which will help me achieve financial independence within a matter of years. I have a brokerage account in which I'm buying stocks. When you are younger, you can afford to take more risk with your investments. As you get older, you should be taking less risk, because essentially you can't afford to start all over.
I also recently discovered Early Retirement Extreme (0). You don't have to be as "extreme" as the author, but there is some sound advice in there. I think it helps that I'm an INTJ like the author and most of the readers of the blog. You have to embrace the idea that saving is better for the individual than perpetuating debt.
(0) http://earlyretirementextreme.com
I don't know what the future will hold, so I am maxing out my TSP (Thrift Savings Plan for US federal employees, like a 401k). I even front-load it, paying as much as I can in the first couple of months of the year, and leaving it at 5% for the rest of the year to get all the matching funds I can. By front-loading, the interest has more principle to compound for the rest of the year. I've also found several TSP websites where people get together to discus ways on maxing their retirement savings. I imagine there might be similar websites for people with 401k plans if you look.
Because I'm at sea and have almost no expenses, I'm investing almost all of my paychecks which will help me achieve financial independence within a matter of years. I have a brokerage account in which I'm buying stocks. When you are younger, you can afford to take more risk with your investments. As you get older, you should be taking less risk, because essentially you can't afford to start all over.
I also recently discovered Early Retirement Extreme (0). You don't have to be as "extreme" as the author, but there is some sound advice in there. I think it helps that I'm an INTJ like the author and most of the readers of the blog. You have to embrace the idea that saving is better for the individual than perpetuating debt.
(0) http://earlyretirementextreme.com
If you ever work at a company with a 401k, make sure you read the matching rules and vesting rules for company contributed funds! If you are not earning 100% of company matched money, you're throwing away money that the company already allocated as part of your total compensation. Maybe that's OK if you want to take the cash home instead, but at least be aware of your options.
Also make sure you look at fund fees; some employers will let you continue operating your 401k after you terminate employment, but you may pay higher fees. Some funds may look great but may have very high fees.
If your company makes automatic contributions (not matching; straight-up contributions) make sure the cash is actually invested in something. Company contributions may have wildly differing vesting schedules, too, be aware.
Also make sure you look at fund fees; some employers will let you continue operating your 401k after you terminate employment, but you may pay higher fees. Some funds may look great but may have very high fees.
If your company makes automatic contributions (not matching; straight-up contributions) make sure the cash is actually invested in something. Company contributions may have wildly differing vesting schedules, too, be aware.
I enjoyed reading this book by Ramit Sethi: http://www.amazon.com/Will-Teach-You-Be-Rich/dp/0761147489/r...
Its full of very basic fundamental advice. It doesn't go into depth into securities options, but emphasizes practical "set and forget" tactics.
TLDR; invest early, invest often, keep a good credit score, stock market is great for returns over the long run (index funds/mutual funds), keep a savings account, automate your investing. Also, did you know your credit card offers perks like extended warranties on purchases (at no cost)?
Its full of very basic fundamental advice. It doesn't go into depth into securities options, but emphasizes practical "set and forget" tactics.
TLDR; invest early, invest often, keep a good credit score, stock market is great for returns over the long run (index funds/mutual funds), keep a savings account, automate your investing. Also, did you know your credit card offers perks like extended warranties on purchases (at no cost)?
First is to figure out what your goals are long term. Then figure out how to work towards those goals. If a 401k fits those goals then start a 401k. Most of the time, though not always, you need to be full time before you can contribute to a company 401k plan.
Best advice I can give, though, is 1) read a lot and 2) never take anything you read at face value.
Best advice I can give, though, is 1) read a lot and 2) never take anything you read at face value.
Get a few different perspectives. Here's one: http://www.mrmoneymustache.com/
Do you have any other business related community sites?
Financial tip for a college grad..
Do either option 1 or 2: Option 1: Spend as much as you want during your college years, go party, and go get laid w/o caring about your grades or getting a job. You still are gonna have to work for the next 40 years anyway.
Option 2: Do a startup while you're in school, ignore everything else(girls, grades, getting a job, etc) so you can strike it rich. Even if you fail, you're still gonna have to work for the next 40 years anyway.
Do either option 1 or 2: Option 1: Spend as much as you want during your college years, go party, and go get laid w/o caring about your grades or getting a job. You still are gonna have to work for the next 40 years anyway.
Option 2: Do a startup while you're in school, ignore everything else(girls, grades, getting a job, etc) so you can strike it rich. Even if you fail, you're still gonna have to work for the next 40 years anyway.
Bogleheads.org is an incredible resource. It's like "HN for investments", IMHO.