Many of us can look back and wish we had managed our finances differently, if only someone had taught us the dangers of debt and the benefits of long-term regular investing. Put that regret to good use by sharing this column with a new college graduate.
Here are five money lessons for those fresh-faced grads:
Control your money, or it will control you: Burying your head about your financial situation can only lead to financial disaster. Set up a system now to track your spending and student loan repayments, and to help automatically set aside some savings. Use Quicken or Mint, or any of the multiple apps designed to give you financial control of your money on a daily and long-term basis.
Beware, debt will bury you: You're probably starting out with a significant amount of student loans, which you must start repaying within six months of graduation. Check out www.IBRinfo.org for ways to manage student loan repayment based on your income (or lack of it). Stretching out repayment is costly but will make that debt manageable.
And, most importantly, don't add to your debt. If you have to live at home or just pay for a room in someone's place, don't overspend and go into debt. Avoid credit card debt, which typically takes more than 30 years to repay if you make only the minimum monthly payments.
Start saving and investing now: That seems impossible to do, but from your first paycheck you'll notice the government is taking out a hunk of money for Social Security, which likely won't be meaningful when you retire. Try making an equal automatic deduction to the company retirement plan or your own IRA, investing it in a diversified stock fund. Based on current $7,347 maximum FICA cost and historic stock market returns, you'd have a retirement account worth nearly $10 million in 50 years. And this would be your money, not a promise from the government.
Don't try to “beat” the market: Even the professionals haven't demonstrated their ability to do that over the long run. In fact, over the past 10 years, 82 percent of professional fund managers have failed to beat their benchmark index.
You just have to “be” the market by investing in a broad index fund, such as the S&P 500, over the long run. According to the historians at Morningstar, that broad index has averaged a 10 percent annual return over the past 75 years with dividends reinvested. In fact, over the long run, dividends have accounted for nearly 40 percent of the total return of the index. Set up automatic dividend reinvestment. And do your investing inside a tax-sheltered retirement account at work or in an IRA.
Hold yourself accountable: Without self-discipline, all the knowledge and good intentions you have today are worthless. When you make your plan, you must stick to it, despite the inevitable temptation to deviate.
History is on your side. A plan of regular investing and an attitude of optimism have triumphed over the past 35 years. After all, the Dow Jones Industrial Average was at 800 in 1981. And despite recessions and inflation and global chaos in the intervening years, it is now nearly at 18,000.
As a new graduate, you have the most precious commodity on your side: time. A wise man taught me that “life either compounds with you or against you.” That certainly applies to financial decisions, as well as decisions you make about your life path, your life partner and your life's moral direction.
Start now to approach your finances directly and with great self-discipline. You'll be far ahead in the long run. And that's The Savage Truth.
Terry Savage is a registered investment adviser and the author of four best-selling books. She responds to questions on her blog at TerrySavage.com.