I received an email from a reader wondering where all the posts were for new graduates. It made me pause for a moment as I realized that I don’t have a lot of material on personal finance for new grads. I should have more as it hasn’t been that long since completing Engineering school (2003).
For those of you who don’t know, even though I came away from University with some savings due to co-op work terms and working part time during school, my wife wasn’t so fortunate. Combined, we had a negative net worth with debt in the $160,000 range including a brand new mortgage. Fortunately, the last 7 years or so has been good to us where we are now close to the half million mark in net worth.
The years after University can be quite an expensive and a financially challenging time. Most start an entry level position (thus entry level pay), need to find their own place to live, perhaps find a car to drive, and even face student loans that require re-payment. It’s especially hard to imagine how a new grad can get ahead financially, but the great news is that it is possible. It just takes a bit of time and discipline.
Having said that, here are my tips on how a new graduate can get on the financial fast track:
Calculate Your Current Financial Position and Set a Goal!
You can’t really know where you’re going until you know where you currently stand. Calculate your net worth to see how your assets and liabilities stack up then set a realistic financial goal to be achieved within a specific time period. The action plan varies depending on the goal (more actionable activities below). Is it to pay down debt? To save for a down payment for a new house? To be a millionaire? Track your net worth quarterly to ensure that you are moving in the right direction.
Create a Budget
It is likely that a new grad has some debt, so it’s important to create a budget to control spending and prevent from getting deeper in debt. Whack away at some of those unnecessary expenses to create as much positive cash flow as possible. It’s also just as important to set aside spending money to reduce the feeling of being restricted. Spending less than you earn is a long term strategy and is one of the easiest and most effective ways to build wealth. Here is a list of some ways that we save money.
Increase Your Income
On the same note of creating positive cash flow, look for ways to increase your income. Maybe a side business that you can run after work? Or perhaps a hobby that you can monetize? Or maybe selling some of that stuff that you don’t need or use anymore. Does your job offer career advancement opportunities? What skill sets do you need to get that raise or increase your profile within the industry?
Delay Lifestyle Inflation
I know, you’re finished University and you feel like a big shot. You feel that you deserve the brand new car, new condo/house, new clothes, electronics and the list goes on. The problem is, all of those things cost a lot of money, money that you probably don’t have…. yet. It takes a bit of time to build wealth and it’s better to be able to afford the toys than to put it all on credit thus creating more debt. My advice? Keep the student minimalistic lifestyle as long as possible to delay lifestyle inflation. At least until consumer debt is paid off. Any increase or unexpected income should also go towards paying down debt.
Debt or Invest?
In my opinion, it should be top priority to pay down high interest student and consumer debt before investing. The exception would be if your company has RRSP matching – take the free money when it’s available! How do you get out of debt? Once you set your budget to generate as much excess cash flow as possible, put any surplus cash on the highest rate debt. Once that is eliminated, put the previous payment plus the surplus cash towards the next highest rate debt and continue until it’s all paid off. Here are more tips on how to get out of debt.
Some students may graduate without any debt at all, and may look to start investing. If you’re the do it yourself type, a great way to start is with an index based portfolio. It is a known fact in the investing world that low cost index funds simply beat actively managed mutual funds over the long term. As cash flow may be smaller when you are just starting out, here are some tips on how to invest small amounts per month which mostly explains how to purchase low cost mutual funds. If you want to go the Exchange Traded Fund (ETF) route, here is a comparison of online discount stock brokers to help choose the lowest cost account for your situation.
As I previously mentioned, it’s important to set aside guilt free spending money to live a little. If vacations are important to you, then include it in your budget, but look for less important expenses to cut out to ensure that positive cash flow is achieved. For our family, we aim for balance and simplicity. We keep costs as low as possible on things that don’t bring long term joy and spend a bit more on things that do. The more you view wealth building as a game, the more fun it will get and the bigger your net worth will grow.
Most importantly, keep reading personal finance blogs like this one. :) What would be your financial advice for new grads?