The one thing I would teach a recent college Grad

It is so SIMPLE to retire well off, if you make just a little sacrifice now. The alternative is making a huge sacrifice later on (in your 40s) and still probably not doing as well as if you made a small sacrifice now.

You just finished your degree and you are probably looking for your first “real” job. This is the perfect opportunity to decide how you would like your financial life to be. You have the choice to spend and buy whatever you feel like which will likely put you in heaps of debt. If you choose this path, you will be in good company. You can be sure most of your peers will take this path.

Or, you can take the road less traveled. You can be one of the “weird” people out there who refuse to believe that they have to be in debt all their lives. You can get motivated by the thought of the freedom that comes with being debt free. This road can sometimes feel like a lonely road, when everything and everyone around you is yelling, “Spend! Spend! Spend!” But, be assured, those who go down this road get the last laugh. They experience freedoms that most people only dream of.

If you are like I was, you will think, “oh, I can spend now, because I will be making more money later.” Well, the truth is that it doesn’t matter how much money you make. Expenses rise to meet income. So, as your income increases, you can be sure that, by default, your expenses will increase as well. Believe it or not, there are people out there with $500K annual salaries filing bankruptcy and in the same moment, you have people who never made more than $50K a year retiring as millionaires. It is not about how much you make. It is about how much you keep.

So, I say all of this to say, if I could teach a college grad only one financial lesson it would be to:

Max out your Roth IRA for five years

By maxing out ($4000 for 2007 and $5000 for 2008) your Roth IRA for the first 5 years after you graduate - you will likely have over $24,000 by the time you are 27. If you add NOTHING else to it, when you are 67 and ready to retire it will be worth over $1,000,000 (assuming 10% growth). If you can keep adding to it, you can really watch the puppy grow!!

But don’t wait, if you wait until you are 27 to start rather than 22 – the million is now down to $675,000 when you retire. Still not bad, but definitely not a million. And if you wait just 5 more years until you are 32 – you are looking at about $415,000 when you retire. So, you can see the importance of doing this right away – no matter what age you are. You can make this retirement figure a lot larger if you keep adding to it, rather than just doing it for 5 years.

Figures calculated with the savings calculator at CNN.com.

Invest the money in an Index fund

Buy an Index fund that follows the S&P 500 – The average performance of U.S. stocks over the last 80 years is over 10%. You may find a few stock mutual funds that occasionally beat the index, but very few consistently beat the average. This is the big secret of the industry – you will never (yes, I can pretty safely say never) have a financial advisor tell you to buy an index fund, because the fees are a lot smaller with an index fund than with a managed stock mutual fund. Therefore everyone involved in the sale of the mutual fund is getting paid a lot less than if you bought a managed mutual fund. The fact is that the great majority of managed stock mutual funds fail to beat the index.

Bottom line: Buy an Index fund in a ROTH IRA account, max it out for your first 5 working years and forget about it until you retire. If you can’t afford to max it out, don’t worry about it, just do the best you can. The purpose of the article is to emphasize how important it is to START EARLY!!

What I wouldn’t tell the grad (but I am thinking)

The reason this is the one thing I would teach them, is because it will probably help them to spend less than they earn – which is the KEY to financial well being. Secondly, if they can do it for five years – it will likely become a habit that they should be able to continue for the rest of their lives. And lastly, there are a bunch of things I would love to teach the grad, but this was the lesson that got me interested enough in money to learn the other lessons that I needed to learn.

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10 Comments
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  1. Recent college grad is listening. :) Though I don’t yet have the $4000 to max out my Roth, but that’s ok. I’m investigating options and plan to put it at least $1000 this month.

  2. @Mrs. Micah
    Good for you!!That is the whole point of the post – to show the youth out there how important it is to start early!! Keep it up!!

  3. Minimum Wage

    You have the choice to spend and buy whatever you feel like which will likely put you in heaps of debt.
    —————————————————

    ???

    When I graduated (and therefore became a non-student), I took a pay cut. I lost my on-campus janitor job and replaced the lost income with a job paying just above minimum wage.

    I graduated with student loan debt and today I still have student loan debt. Today I live on macaroni and cheese and other cheap staples.

    Not only do I fail to see how it is SIMPLE to retire well off, I have difficulty imagining ever being able to retire at all.

  4. @Minimum
    I am sorry it worked out that way for you after college, I know it can be difficult to find a good job after graduating. But I think that a pay decrease after college is an exception rather than a rule. Quite often college grads have a lot more money once they get a job than they did while in school. This was the reason I focused on them, normally that extra income goes to wasteful things and I wanted to point out something valuable that could be done with it.

    As far as retirement savings – The key is to start with something – even if it is $10 a month, work it out of your spendable cash and into savings. Keep increasing it as your income rises and debts are paid off…

  5. Great advice.

  6. I’m a recent college grad, I graduated at 19 with my bachelor’s in Digital Arts & Design, and am now making over 45k a year in my first job out of school, and actually am setting up my 401k through my company as we speak. They will be matching me 100% up to 4% of my salary as I put that from my paycheck into my 401k. I’ll be maxing this out, as well as hopefully starting up a separate RothIRA here as soon as it is affordable. I have over 60k in debt from school, and I’ll be paying that off as quickly as I can, so its tough to decide what to put into the 401k and Roth, but I know I’ll benefit so much more from starting those accounts at 19 then just paying off school as quick as possible in the long run.

    Loved the article, makes perfect sense, thanks a lot!!!

  7. I agree with most of this–saving into a Roth IRA for five years. If one feels this is unable, the goal should be to save a minimum of 10% of their gross income. However, I would say a small cap value index fund would be better than a S&P 500 Index Fund. However, as the account grows they should diversify into a S&P 500 Index Fund, large cap value index fund, small cap index fund, international index fund, etc. This will most likely perform better and may have lower volatility than just placing it all in a S&P 500 Index Fund. Nevertheless, your advice is great!

  8. Hi Bob. I have a question for you. I am a recent grad who had a job and a retirement account during the two years of post-college to starting grad school. Now I’m just starting grad school with student loans and I wanted to find out if it’s best to stop adding to it until I graduate.

    Also, what’s your opinion regarding tithing while in grad school on student loans?

    Thanks!

  9. Bob, where do you recommend buying the index from? Do you prefer the online tools like Scottrade?

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