What are your early financial tips? Should I start a 401K
An ADP Retirement service broker dealer connected to an office I'm interning at came to talk to the employees that have been here for a while about a simple IRA which had been set up for them.
Are there any financial tips you can give, both short-term and long-term, for a college student/graduate?
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[ 2.9 ms ] story [ 37.9 ms ] threadDo either option 1 or 2: Option 1: Spend as much as you want during your college years, go party, and go get laid w/o caring about your grades or getting a job. You still are gonna have to work for the next 40 years anyway.
Option 2: Do a startup while you're in school, ignore everything else(girls, grades, getting a job, etc) so you can strike it rich. Even if you fail, you're still gonna have to work for the next 40 years anyway.
Best advice I can give, though, is 1) read a lot and 2) never take anything you read at face value.
Also make sure you look at fund fees; some employers will let you continue operating your 401k after you terminate employment, but you may pay higher fees. Some funds may look great but may have very high fees.
If your company makes automatic contributions (not matching; straight-up contributions) make sure the cash is actually invested in something. Company contributions may have wildly differing vesting schedules, too, be aware.
Its full of very basic fundamental advice. It doesn't go into depth into securities options, but emphasizes practical "set and forget" tactics.
TLDR; invest early, invest often, keep a good credit score, stock market is great for returns over the long run (index funds/mutual funds), keep a savings account, automate your investing. Also, did you know your credit card offers perks like extended warranties on purchases (at no cost)?
After that point, you're going to get wildly different ideas of how to save your money. Most commonly people will suggest high risk, high return assets (stocks or stock funds, as opposed to bonds or bond-based mutual funds), since even if you lose everything, then you still have the rest of your life ahead of you. Basically what it comes down to is how to compound your earnings combined with the tax burden. Each of these have different rules as to maximum contributions per year, when you can take your money out, etc.
* Traditional 401k or IRA - Pre tax money, lowers your income taxes now in favor of paying tax later (you suspect your tax rate will decrease -- probably not true as a student)
* Roth 401k or IRA - Post tax money. Pay tax now, and none later (you suspect your taxes will go up)
* Brokerage accounts - Pay taxes on gains as income or capital gains (most tax, most liquidity).
Within each of these you can choose how to invest your money for your risk/reward tolerance. Bonds, Funds, and Stocks are how most people invest. Some choose to do real estate. Some choose to do more riskier things like derivatives. Wikipedia has a full list (http://en.wikipedia.org/wiki/Financial_market).
So long as you diversify, you should get an overall good return and won't be subject to volatility in one particular investment. However, due to minimum investments for the first few years it's probably best to diversify over time, rather than right from the beginning.
I graduated 2 years ago, so I've had to brush up on all of this stuff, along with supplemental benefits like AD&D, life insurance, etc. If you have any questions my email is in my profile.
Here is a postcard cheat-sheet of "what to do with your money," per the OP's request:
1) Pay down credit cards and never carry a balance.
2) Keep 3-6 months' worth of income in a savings account for emergencies.
3) Invest in your 401k up to company match. Put everything in a TSM or SP500 index fund and forget about it.
4) Pay down mortgage, car payments, student loans.
5) If you still have any money, talk to an accountant for investment advice. 401k, IRA, etc are good options.
6) Invest for the future, and live a full life in the present!
This is a really good point. I pretty much expect taxes will go up for everyone at some point so it seems like it's a no-brainer to open a roth IRA now. I have never heard of a Roth 401k though.
I don't know what the future will hold, so I am maxing out my TSP (Thrift Savings Plan for US federal employees, like a 401k). I even front-load it, paying as much as I can in the first couple of months of the year, and leaving it at 5% for the rest of the year to get all the matching funds I can. By front-loading, the interest has more principle to compound for the rest of the year. I've also found several TSP websites where people get together to discus ways on maxing their retirement savings. I imagine there might be similar websites for people with 401k plans if you look.
Because I'm at sea and have almost no expenses, I'm investing almost all of my paychecks which will help me achieve financial independence within a matter of years. I have a brokerage account in which I'm buying stocks. When you are younger, you can afford to take more risk with your investments. As you get older, you should be taking less risk, because essentially you can't afford to start all over.
I also recently discovered Early Retirement Extreme (0). You don't have to be as "extreme" as the author, but there is some sound advice in there. I think it helps that I'm an INTJ like the author and most of the readers of the blog. You have to embrace the idea that saving is better for the individual than perpetuating debt.
(0) http://earlyretirementextreme.com
1) Maximize your employee 401K benefits - This has been stated before but 401k matching is tax sheltered and more importantly, is free money from your employeer
2) Treat your credit card like a debit card - Never carry a balance, never use it to buy things you don't have savings to buy.
3) Carry cash assets in high yield savings accounts - While interest rates currently, suck, there is no reason to let your money sit in a non-interest bearing account.
4) Avoid paying tax on income as much as possible - There are a lot of financial instruments (401K, IRA) that allow you to defer tax. If you are in a state with significant tax rates (i.e. California) deferring tax can hugely valuable.
5) Learn how to financially model - This is probably my most valuable tip. You should understand the implications of every significant expenditure you make. Since I love modeling, I go a bit overboard on this but it really makes your decisions a lot more clearer. Some typical decisions that you should be able to model with a DCF: competing job offers, buying vs. renting, going to grad school, etc.
6) Financially model & think heavily before going to graduate school. As you hit the mid to late 20s, you may feel a lot of pressure to go grad school due to changing careers, getting pedigree, peer pressure, etc. Higher education in the US is extremely expensive; make sure you model the costs (including the lost opportunity cost of salary) before cutting a check. I've had a lot of colleagues waste money on MBAs that were largely un-necessary. There are also a lot of ways to switch careers without another degree (I did it myself 3 times without any new degree).
7) If you are open to working outside of the US, consider working for a few years in countries like Dubai where you can legally reduce your tax payments. A reduction in your taxes can easily double or triple your take home salary (even if your salary stays the same or even reduces). This benefit erodes as your salary increases so consider this in early stages of your career (it also becomes harder to move internationally as you grow older).
8)Negotiate every salary offer, ideally with competing offers, even if the offer is your dream job. Most people stop looking for jobs when they are close to the offer. What do I do? I accelerate my interview process and reach out to competitors to see if I can get competing offers before I have to decide on the offer. No good company will fault you for negotiating your offer and negotiation almost always improves your offer significantly.
9) When comparing & contrasting offers in different cities consider your "savings income": i.e. pay - taxes - living expenses. Some people instead rely on cost of living which results in incorrect decisions (a 50% increase in cost of living doesn't mean you need 50% higher in salary to net the same money).
10) Choose credit cards that give you the highest cashback (usually). This isn't always the right choice (i.e. if you fly a lot mile cards may be better) but in most cases 2% cashback card will beat out any card and cash is conveniently liquid (unlike miles). Also don't open more than a few cards as that will just open you to risk, abuse, and a lower credit score. Do NOT open a credit card just to get a free t-shirt or $40 off a purchase. My rule of thumb is that a credit card should return at least $300 annually (not just the first year).
11) Try to allocate expenditure on your "happiness ROI". I am extremely frugal on things that do not improve my happiness for the long term and relatively extravagant on things that do.
Things worth splurging money on [for me]: Experiences & travel, reducing commute time, fitness activities, books, a comfortable bed Things probably not worth splurging on [for me]: Fancy & shiny new car, a bigger apartment/house, expensive new furniture, expensive non-work clo...