Graduating from college is a tremendously promising time for young people. They're looking forward to starting their careers, perhaps settling in new cities, and starting the next exciting phase of their lives.
There's another thing they should do as they leave the college books behind: Start a successful financial life.
That's not necessarily the first thing on recent grads' minds, but the beginning of their career is the perfect time to set themselves up for a healthy financial future. Their first "real" job usually brings large paychecks in comparison to their austere college budgets. But spending often increases to match their new income, leaving little for savings.
Grads can avoid this trap in several ways. The first is to set up an automatic savings plan that deposits a set percentage from their paycheck into an investment account. Because it's unlikely that recent grads have experienced a substantial paycheck, by automatically saving 10% of their income, they won't feel like they are sacrificing anything.
Company matches are another way recent grads can lay a solid foundation for their financial future. If your employer offered you extra cash in your paycheck each month, would you refuse? Most likely, the answer is no. By not taking their employer's 401(k) match, new hires would be leaving real dollars on the table.
There are few faster ways that recent grads can grow their money than an employer's retirement savings match. Even if the investment offerings in a 401(k) are not so hot or have high fees, it is still vital to contribute enough to get the match.
Starting early is crucial. With the power of compound interest, less invested out-of-pocket now results in more later.
For example, saving $12,000 a year starting at age 25 will result in more than $2.5 million at age 65, for a total outlay of less than $509,000 (assuming a 7% return). If saving is delayed until age 35, the same $2.5 million result would require $26,000 a year, for a total outlay of $806,000. At 45, it takes $57,000 a year, for a total outlay of about a $1.2 million, to reach the same amount of savings.
Put another way, to reach the same savings at retirement, recent grads will have to double contributions to their 401(k)s if they wait until age 35 compared to starting at age 25. The same amount requires four times the savings at 45, and eight times the savings at 55.
Of course, there are many financial obligations vying for a recent grad's newfound income. Besides starting a solid savings plan, they'll need to create an emergency fund, maybe begin paying off student loans and spend on a household. Balancing these competing priorities is a challenge, one that may mean making some sacrifices in the near term, so they can build their wealth for long-term financial well-being.
Graduation means taking on adult responsibilities, which include saving enough to ensure one's own financial independence. These simple steps — starting to save when they won't notice money missing from their paycheck and taking advantage of their employer's 401(k) match while they're young enough to benefit from the long-term power of compound growth — will make that feasible.
Later in life, this could afford them the opportunity to choose to work because want to, not because they have to.