I’ve been doing some reflecting lately as it has been over five years since I donned my cap and gown. I have been wondering how far I’ve come since I graduated college in May of 2009 with a full-time job offer set to begin in August. My plan for that summer was to get as many masters classes out of the way as possible, so that I wouldn’t have to kill myself too bad working full-time and trying to earn my masters degree. I am happy I jumped right into it as it definitely made my life easier in the long run.
I wouldn’t say I made any major errors with my finances after college such as buying too much of a house or not saving for retirement, but I definitely could have done better. Therefore I will use my experiences (good and bad) to outline a plan I wish I had followed with my finances post graduation.
Step 1 – Move back home (if possible):
Luckily my parents welcomed me back with open arms when I graduated college. I know this is not an option for everyone, but I was lucky to have this option and I took advantage of it. They didn’t charge me any rent, and it was much easier to get my financial feet underneath me while living at home. I only stayed for about a year, but looking back I wish I had stayed longer. I decided after a year to move closer to work since my parents’ home was approximately an hour commute each way which got old fast. Plus I wanted to become more “independent” and not live with the rents anymore.
If this isn’t an option for you because of personal situations or your job is too far away, try moving in with a relative that will rent you a bedroom at a discounted price, or try to split an apartment with as many people as possible to lower your costs that way. When I moved out, I moved into a 2 bedroom apartment 10 minutes from work with a friend from college. While I now had a rent payment, my commuting costs went way down.
Step 2 – Pay off all personal loans and credit card debt:
I had opened up a 12 or 18 month 0% introductory interest rate credit card my last year of undergrad. I did this to build more credit, but mainly to fund my living expenses while still keeping an emergency fund in my checking account. So when I began my full-time job in August, the first thing I did was pay off whatever balance was on this card (it wasn’t too much, probably around $1k and was still in the 0% introductory period). I also believe I owed my parents about $1k, which I paid off next. It was obviously a non-interest bearing loan, but I hated owing my parents money.
I’m not recommending, by any means, that college students open up credit cards to fund their living expenses. It was appropriate for me because I knew I had the money in my bank account, and am very diligent in my spending. I’m not one to buy things just because I have the funds available. Not everyone has this mindset though.
Step 3 – Save for retirement:
Putting saving for retirement as step 3 is a little misleading. I put this as step #3 just for the reason that most employers (from my experience) do not let you contribute to their 401k plan for three months or so after your start date. If your employer offers a match based off of your contribution, always contribute the required percentage to maximize the employer match as soon as possible.
Every company’s 401k plan is different, so just research yours. Some companies do not match at all, while I’ve seen others that will put in a percentage of your pay whether you contribute or not.
One thing I wish I did was contribute to an IRA. MadFIentist has written how the traditional IRA is the best option, and I’m not arguing against this but it has many factors limiting its benefits. It has a relatively low phase-out for the income tax deduction and accessing the funds while still earning income is not the best.
Currently I am phased-out of the traditional IRA and utilize the Roth IRA now. I really like the Roth IRA because contributions can always be distributed tax and penalty free, and then after 59.5 years old all distributions are tax and penalty free, including appreciation.
Step 4 – Pay off student loans:
Although my student loans went into deferment while I was earning my masters degree, that didn’t stop me from paying them down. I believe my highest interest rate student loans were 6.8% and I knew from the start I didn’t want those around for long. So I would pay down the high interest rate loans during deferment, and then once all the loans were active and I was paying them, I would pay minimum on the lower interest loans and extra towards the 6.8% loans.
I’m not a fan of the debt snowball method where the smaller debt balances are paid off first. Why pay off a $2k loan at 2% when you have a $10k loan at 6%? I am a fan of the debt avalanche method where I pay the minimum on low interest balances, and extra principal towards the higher interest bearing balances.
Right now I’m facing a dilemma because my only student loans left are at 3% (I have less than $10k left). I unfortunately do not receive the student loan interest deduction anymore but could pay them off if I wanted to. I just have a hard time paying off a relatively low interest rate when I would rather use that money to max out my retirement accounts sooner. So for the time being I’m going to settle in the middle since that makes me most comfortable and pay extra every month towards the student loans but not pay them off in full.
Step 5 – Don’t try and keep up with Joneses:
I made one mistake that I actually regret when it comes to my finances after college. A year after graduating, my car that I purchased with my own cash when I was 16 “shit the bed.” I was contemplating getting a used Toyota Camry and paying cash (less than $10k) or taking out a car loan for a “nicer” used car. What one do you think I chose? Of course choice B! I took out a four year used car loan at 6.39%.
Luckily I knew this was “bad debt” that was for a depreciating asset, but I took out a car loan anyways since “everyone else was doing it!” I knew I couldn’t deduct this interest for income tax purposes and my car was depreciating by the day, so I paid extra towards the loan every month. I paid it off in about 2.5 years, and then ended up selling it last year when I moved to NYC. I don’t think I’ll ever have a car loan again… lesson learned!
Some advice that I’ve been hearing lately that I can’t stand is “buy a house since interest rates are so low.” Interest rates are extremely low and hovering less than 4% for a 30 year fixed mortgage. I believe a house is not an investment unless it is providing you a return on your investment, such as cash flow.
People will use the excuse that it is a good tax deduction, which I can’t stand as well. If your mortgage rate is 4% and you’re in the 25% federal tax bracket, that’s still 3% of your principal balance that you’re paying in interest every year that you will never see again. Plus you are now responsible for property taxes, PMI if you don’t have at least 20% equity in the home, maintenance, all utilities, insurance, etc.
You should purchase a house when 1) you are sure you can afford it (not just that the mortgage broker says you can), 2) you are sure you are going to live in the area for longer than a couple years, 3) you are comfortable with home maintenance or at lease knowledgeable enough to contract it out, 4) a mortgage does not keep you up at night, and 5) you’re not thinking of owning a home as an investment.
Step 6 – What to do after student loans are paid off and all tax advantaged accounts are maxed out:
Those lucky enough to graduate without student loans, or who were focused enough and earned enough to pay them off early and max out their 401k and their IRA for the year, and have an emergency fund sometimes feel stuck with what they should do with their money. Should I build up my cash savings? Should I invest in an after-tax brokerage account? Should I invest in real estate?
In all honesty there are a million answers to these questions, and every popular financial blogger has wrote about their strategies. But in all honesty it is whatever makes you more comfortable. Sure there are answers that will most likely lead to a greater return on your investment over the long-term, but if those methods make you feel insecure then they are not for you.
I did not give an emergency fund its own step as it is different for everyone. I think emergency funds are extremely important, but if you’re able to move home after college and live rent free (or at least discounted), then I would worry about paying off any consumer debt and high interest student loans first. This is completely different for those who are completely supporting themselves, or a spouse, or a child, where this is much more of a necessity and should be prioritized. When I lived at home my only living expenses were student loans for the most part, so a couple thousand was enough for a six month emergency fund. But once I moved out into my own place I had to bump that up to keep it at six months of my living expenses.
Does anyone have any financial regrets about their early 20’s? What did you do well that you are proud of?