Post College Finance Guide

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?

-FF

17 thoughts on “Post College Finance Guide

  1. Debtless in Texas

    I graduated college with no debt and had a good job (military). While overseas and earning tax free pay, I didn’t maximize my financial potential. When I got back, I bought a new convertible Camaro, had a tough time finding a job, and partied like I was a freshman again.

    I probably made about 120k of tax free income and used it to support my extravagant lifestyle for a few years until I got my life back in order. It pains me to think about what I could have done with all of that money and how I SHOULD have invested it – but hindsight is 20/20. I think these kinds of mistakes make us who we are today and teach us the tough lessons…but looking back I still get that sinking feeling in the stomach. I’m glad I have it, if I ever want to do something stupid, I am reminded not to!
    Debtless in Texas recently posted…It’s Beer Friday, EXCEL-entMy Profile

    Reply
    1. Fervent Finance Post author

      The past is the past, we just need to learn from it. And that’s exactly what you did.

      I know the military and the enlisted have much more important things on their mind, but it’s tough being teens and early twenties and coming back from overseas and knowing what to do with your tax-free pay that has been building up. When I was a teenager I worked with someone in the Army National Guard. He did a tour, and came home with $30k but had no idea what to do with it. So he did what his buddies were doing and bought a brand new motorcycle and car. I wish he had known more about money!

      Thank you for your service!

      Reply
    1. Fervent Finance Post author

      It definitely helps! I wish my work had been closer, because the commute was really killer. If that was the case maybe I would have stayed longer, but I probably still would have gotten the itch to be independent anyways. Thanks for stopping by!

      Reply
  2. Gen Y Finance Guy

    Definitely don’t buy a house because interest rates are low or because of the tax deduction. We bought a house because it was cheaper than renting even after you factor in the true cost of owning a home. We were paying $3,000/month in rent and now our mortgage is $1615/month or $2,215/month with property taxes and insurance.

    I also wanted to fix my cost of living and not be subject to rent increases. I think that is a nice benefit of buying a house if you plan to be in one place for a decent amount of time. We also plan to pay off our mortgage early to free up some life options.

    I am not too far ahead of you since I walked about a year ahead of you and officially graduated in December of 2008. In my “early” 20’s…wow it feels funny writing that…I for sure made a ton of financial mistakes that cost me a lot of money:

    1) Bought my first house at 20 with a investment partner that took advantage of my naivety. I was the “credit partner” and was the one on the loan. He was only on title. I was supposed to get paid $1,000/month for letting him use my credit and then after 3 months we were supposed to do a formal loan assumption and I was to get an additional $5,000. In total I was supposed to make $8,000. Well he hadn’t made any of the payments as he said he would. To make a long story short I had to end up paying him $5,000 to get him to sign his name off the title. I rented it at a negative cashflow of $1,000 a month for 2.5 years. Eventually I let it go to foreclosure. Oh and don’t forget about the $15,000 in missed mortgage payments I had to come up with. All in all it cost me $50,000 and my credit tanked from 760 to 530. Fortunately I have since recovered to 780.

    2) When I first started investing at 18 years old I used my student loan money of $8,000 to fund my brokerage account. I had no idea what I was doing. All I knew is that you bought stock and it went up in value. Well I turned the $8,000 into $20,000 through pure luck and a good time in the market. Then I decided to start using margin which turned my $20,000 into $40,000 worth of buying power. I still had no idea what I was doing, but it seemed like easy money. I decided to buy a bio pharmaceutical company that I was sure was going to the moon. They had a cancer related drug going to FDA approval, it was a make or break moment. The drug was denied and the stock I bought for $4.50/share was worth $0.10 after the report came out and I was able to liquidate. That left my brokerage account at $4,000 after I got a margin call and had to liquidate everything.

    3) I spent $32,000 cash in 2011 on a new car that I didn’t need. At the time I had a car that was paid for and only 4 years old. But “I earned it”, and everything said “you can afford it”. So I fell trap to consumerism. The good news is that I plan to keep the car for 10 years minimum.

    4) I didn’t learn and ended up buying my wife a new car for $30,000 in 2012. This time we financed it and paid it off early in less than 2 years. We didn’t pay cash because we wanted to buy a house and wanted to have a down payment available. We finally put the car loan to bed in December of 2014.

    5) We spent $30K on our wedding. Don’t get me wrong it was an awesome party at the Hardrock in downtown San Diego. People still tell stories of our wedding and how epic it was. But then you consider the $5,000 we paid for the honeymoon. The $10K I spent on the ring (and that was at wholesale due to a family connection). Wow that was a lot of money.

    So yes I wasted a lot of money in my early 20’s. But I did manage to do a few things right as well.

    1) I built up over $100K in retirement. Now we are starting to build my wife’s account up as well.

    2) We don’t have any debt outside of our mortgage.

    3) We do have a rental condo.

    4) I worked really hard and have earned double digit raises every year since graduating.

    5) Because of the foreclosure and investment losses, I set out to become a sophisticated investor and trader. I even traded professionally for an oil company managing $25M for a couple years from 2010 to 2012.

    Like Brian said our mistakes are what set us on our path. I would not be in the financial position I am today if I had not learned some hard lessons early on. I am grateful for learning the lessons early on.

    Now its onward and upward my friend.

    Cheers!
    Gen Y Finance Guy recently posted…Paying Off Your Mortgage Early vs. Investing The Extra Payments In StocksMy Profile

    Reply
    1. Fervent Finance Post author

      Thanks for your thoughtful comment GYFG.

      1) That sounds terrible. I’m glad it is over with and your credit score has recovered. I currently have some close friends who are looking to go into partnership together on a rental property. I’m extremely skeptical and don’t think I’m really cut out for partnership. Although it would be nice for someone to help with the capital outlay needed for real estate, I don’t want to have something happen to ruin our friendship, just to hopefully make some money. Maybe down the road I’ll change my mind.

      2) I traded stocks all through college. I made money from the start as well, and I was hooked. Until I invested $5k in a solar company since I thought that was the next big thing. But I think I was about 10-15 years too soon on that idea since it went bankrupt 🙂

      3) I’ve luckily learned that you should never trust a car salesman or mortgage broker on what I can “afford.”

      5) Weddings are a blast for sure! But I remember the $80k extravagant Italian wedding I went to as much as another which probably cost less than $20k.

      As for your the things you did right, it’s awesome that your only debt now is the mortgage! At your age, that’s impressive. Also I think its great when people in their 20s realize how important taking advantage of their 401k and IRAs now is. Thinking of all those years of compounding is getting me excited as I type!

      I’ll be looking for big things out of your camp in the future. Thanks for sharing!

      Reply
  3. Andrew@LivingRichCheaply

    I moved back home too but I paid rent $600-$700 a month…but I did get free meals and it was probably slightly below market rent. I did contribute to my 401k and IRA…thanks to my dad for encouraging me to do so. I wish I had contributed more though. I didn’t really try to keep up with the Joneses and didn’t spend too much since I went back to grad school at night and still worked so not much time to spend.
    Andrew@LivingRichCheaply recently posted…Are You Afraid to Take the Leap?My Profile

    Reply
    1. Fervent Finance Post author

      Yeah I think everyone looks back and says “I wish I saved a little more.” I know I do for sure. But being busy is definitely a way to spend less money. I know when I was working full-time and earning a masters degree among other things, it leaves less time for spending money.

      Reply
    1. Fervent Finance Post author

      Agreed Jason – not everyone has that option and everyone’s backgrounds are different. I’ve had friends that have had full rides due to their family’s very low income, or full rides to to merit, and others who have had to pay for everything themselves. For some of those that had to pay everything themselves, they went to community college for 2 years first and saved tens of thousands of dollars that way. I too feel your pain as I took out many private loans to fund my college education, which I do not regret as things have since worked out, but would have liked to not of had to do that. Good luck on your future and thanks for stopping by!

      Reply
  4. Dividend Beginner

    Hi Fervent Finance,

    This is a great list my friend! I agree with every single point.I actually live with my parents right now at 21 and am working full time in IT. Still haven’t gotten a university degree but will be there soon!

    Best Regards,
    Dividend Beginner

    Reply
    1. Fervent Finance Post author

      Thanks DB. Nothing wrong with living at home, as long as you are taking the money you would be spending if living on your own and instead paying down debt, saving for retirement, building an emergency fund, etc. Thanks for stopping by.

      Reply
  5. Isaac

    I’ve actually made the decision NOT to put money into the Roth IRA after reading this article from Go Curry Cracker – http://www.gocurrycracker.com/roth-sucks/. What are your thoughts?

    For a married couple, it would mean we’d be living on more than $90,000 in retirement – otherwise a regular, taxable account has the same benefits and allows us to tap into the money WAY earlier and not pay taxes on it at any point as long as we stay in 15% or below tax bracket in retirement

    Reply
    1. Fervent Finance Post author

      Hi Isaac. I’ve also been contemplating the pros and cons of a Roth IRA. I contributed the max in 2014 and 2015, but I have to re-evaluate for 2016. In the big scheme of things though, $5,500 contribution each year isn’t going to make or break me. Maybe I’ll write a post about my views on it in the future. Thanks for stopping by.

      Reply

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