Have you ever thought about what you might say if you were up in front of a group of shiny new graduates, tasked with giving them advice to help them get their adult lives off on the right track?
We recently asked Morningstar.com readers to share their best financial advice for new grads, or anyone just getting started with their financial lives. Readers had much valuable wisdom to impart, weighing in on everything from taking advantage of employer matching contributions to driving used cars to reducing daily outlays for coffees and lunches.
To read the complete thread or share your own wisdom on this front, click here. The following is an overview of some of their comments.
'The Answer Is Pay Yourself First'
Uinutah made the very good point that selling 20-somethings on the merits of saving for retirement is tough; this poster suggests that some reframing is in order. "Maybe we're using the wrong word: To a 20-something, 'saving for retirement' sounds deadly, like prepaying for a funeral. I like to think of it as 'buying my freedom.' So long as I depend on a job to pay my bills, the job owns me. It was only when I'd saved enough to know that I had the choice of not working that I began to breathe freely and enjoy going to work each day."
From a practical standoint, posters agreed that a best practice for those just starting out with a retirement-savings plan is to adhere to a savings target and adjust other expenses accordingly.
First out of the box with this advice was Juris 2, who wrote, "At risk of resorting to a cliche, the answer is 'Pay yourself first.' Especially once you get a full-time job, always turn the first dollars (5%-15%) of your pay into contributions to a tax-qualified account (IRA, 401(k), etc.). Your 'net' after this is your operating weekly/monthly budget, which you can also spend, save, or invest."
Posters also enthused about taking advantage of company retirement plans as soon as first eligible.
As Myshkin noted, newbie investors who don't take advantage of the opportunity to contribute to a company retirement plan are potentially missing matching funds and a tax break. "[I]f you have a 401(k) with a company match (or some other employer incentive), you are passing up free money if you do not contribute enough to get the company match. ... Also, the 'sticker shock' when they see the taxes that are being withheld from those first checks makes a good talking point. ... See how much lower that withholding could be if you contribute to a tax-advantaged investment."
However, ctyankee also pointed out that investors on starting salaries may be ideally positioned to make Roth contributions--that is, contribute money that has already been taxed. "[W]hen you're young and likely in a lower tax bracket than you're going to be [later on] ... this is the time to do a Roth investment or a traditional IRA to Roth conversion."
Respondents also discussed the virtues of increasing the savings rate along with the paycheck. Reneeh63 advised, "[R]evisit [your investment contributions] at least annually and increase the amounts--for some accounts you can even automate these increases."
Woninvegas has found it valuable to enjoy those raises a bit while also enlarging the nest egg. "As I received pay increases over the years, I've tried to strike a balance between adding more to my 401(k) contribution and keeping some for myself as a reward for my hard work. For example, if I received a 2% increase, I increased by 401(k) contribution by 1% and kept the other."
Several posters also touched on the importance of not raiding retirement accounts once they're up and running. "The real trick with retirement accounts is to leave the money in the accounts and allow the accounts to grow over a lengthy period of time," said seaside1. "If you are an individual who changes jobs and chooses to cash out retirement account assets instead of rolling them over to another employer retirement account or rollover IRA, you will miss out on all the compound growth for those accumulated assets and may find yourself short for retirement funds."
'Just Start Something and Stick With It'
BBUDD suggested automating IRA contributions, to come close to the forced savings that accompany investing through a company retirement plan. "Sign up for automatic withdrawal from your checking account to fund your IRA to its maximum," this poster advised.
George1 counseled new savers to put "found money" to work as soon as possible. "Take advantage of unexpected income like [an] inheritance, tax refunds, company bonuses, cash gifts, etc. Instead of spending it on some short-term toy like a boat or a motorcycle, invest it. Along with routine savings like 401(k) contributions, your savings will mount up over the years."
Wilbodave advised would-be savers to not worry about starting small. This poster wrote, "What I often advise is 'just start something and stick with it,' even if it's only five bucks a week. ... [I]f people can get into the habit of saving regularly by starting with whatever they feel they can spare, maybe they'll realize they can save a little more than they first thought."
In addition to not being put off by starting small, nor should investors be deterred if they're getting a late start. Advised Simajima: "With both of us working, kids finished with college, kids out of the house, we were able to reach our retirement goals by using the catch-up feature in our 401(k)s--available to people 50 years old. With both of us working and too tired to spend it back then, we are both retired now with a very comfortable retirement savings."
Posters also shared advice for steering that starter investment portfolio. CharlesJ advised, "Don't be afraid to get aggressive (not gambling). You should be able to get at least market returns." This poster also advised newbies to "pay attention to fund costs (expense ratios)."
'Gotta Forget the Starbucks and Pack the Lunch'
Of course, for all but the extremely wealthy, being able to save a substantial sum depends on a frugal lifestyle, and readers had all sorts of practical advice to share on that front.
"This can be very hard based on how you were brought up, but I'd say aim to live at or below your means whenever possible," wrote Matthew9. "The more gratification you can delay today, the better the chance you'll have at achieving partial or hopefully even complete financial independence sooner in your life."
BMWLover echoed the merits of delayed gratification and financial peace of mind, writing, "Just do it! Don't think about today, but the good feeling you'll have tomorrow."
To help arrive at a reasonable budget, Rush187 advised, "Count the money in your pocket at the end of each day for three months. Keep a journal of exactly what you spent each red cent for. At the end of the three months, categorize the expenses between needs and wants. [You] will find money to start 'investing in your own future.'"
JHAsheville agreed that monitoring those small expenses can add up to some serious money. "Gotta forget those Starbucks and pack the lunch for work every day. Amazing how those $5-$10 savings add up quickly," she wrote.
Emily17 would advise new grads to avoid big-ticket expenses. "[D]on't buy the house and the car you've been fantasizing about buying as soon as you graduate from college and start earning those first shiny paychecks. Once you do, your money is spent. Those payments are locked in for years, before you realize how little money you have and how far the money you do have doesn't go. Spend the first year continuing to live, not quite as you did in college (let's be realistic), but slightly above. Learn to save before you learn to spend."
Marti038 advised young investors to "[a]void debt like it is the plague itself. Nothing will more quickly erode investing potential for your income than spending money you don't have."
Automated bill-paying can help, too. Island wrote, "Set up your credit cards to pay automatically out of your checking so you never pay interest on a credit card your entire life."
BR4777 shared several good ideas about how to free up money for additional savings, but this respondent's top tip was to get cozy on the housing front. "Unless married, stick with having roommates for a few years," this poster advised. "By itself, this can free up enough to fund either the 401(k) ... once you have a job or an individual IRA, deductible or not."
Skipperchg also provided several good pointers on finding money to save, including this one: "That 'new car' has to be a used car. Never [overspend] on a deteriorating asset that is going to cost maintenance, too."
Finding the right partner is important to a healthy financial life, advised Jomil. "Marry someone who will enhance your financial stability through his or her good habits and not lead you in the direction of spending beyond your means," this poster wrote.
Few posters were in favor of a life of absolute austerity; indeed, many posters agree that a healthy financial life is ensuring that your spending aligns with your actual priorities. Pavlov wrote, "Learn to distinguish early on between 'needs' and 'wants' and determine what in life truly makes you happy. Spend your money only on the things you need and the things that make you truly happy. I hope that you will find that if you limit your spending in this way, you will have money to save for a future of financial security and freedom to do what you really want to do."