Welcome back, TOM readers, today we will be continuing the Graduate’s Guide to Personal Finance. You can find part one of this two-part series here. As we discussed, this guide was crafted to help new graduates navigate the complex world of personal finance. This guide is also a great reference for equipping parents and grandparents who are or wish to mentor graduates. However you choose to use it, I hope our discussion provides some timeless and useful advice for all young graduates.
And off we go …
Step Four – Open Accounts That Match Your Goals
Now that you have a good understanding of what you spend, you’ve built a sufficient emergency fund, and you’ve gained a better perspective on the cost of your debt, it is time to move onto saving. Saving is simple in theory, you just set aside the income that is above and beyond what you spend, but there is also a strategic aspect to saving.
As a new graduate, you traditionally have two accounts – a checking account and a savings account. Your checking account for your everyday spending while setting aside the surplus into your savings account. Going forward, I suggest that you begin opening accounts that are earmarked for specific goals, like buying a new car or retirement or a future home purchase. These goals should be set with a specific date that you would like to accomplish them by and the goals should be prioritized.
Once you’ve set the target dates for achievement and itemized the goals by priority level, it makes it easy to figure out how much to set aside into each account every month. You just take the cost of the goal, divide it by your stated time horizon, and then factor in the expected growth rate of that money. This also simplifies the investment selection within these accounts because you can resource the most appropriate investment based on the expected time horizon for each specific goal.
Remember, as we discussed in former articles on TOM, Matchmaker, Matchmaker, Make Me a Match and Is There A Monster Under your Financial Bed?, you will want to place your money that is earmarked for short-term goals in less volatile investments and you’ll also need to factor in all the tax implications in order to choose the appropriate account type.
Step Five – Automate Your Savings
This next step is easy – automate everything. Life moves fast, and many of us stay very busy, so you really want a lot of this to be on auto-pilot. The technology available to you at most all financial institutions will allow you to set up recurring contributions to these newly minted accounts.
Once you have completed the busy work involved with establishing the accounts, identifying the goals, and matching the appropriate investments, you’ll want to set these accounts to be funded automatically each month.
Most often, you will find yourself being pleasantly surprised by the growth of these accounts, as the regular contributions will make a BIG difference over time.
Step Six – Stay the Course
Step six may very well be the hardest of all. This step is not dependent on IQ, and it’s not a burdensome task to be checked off the list, but rather it is the art of patience. Once you have established your goals and how to achieve those goals, things will inevitably not go as planned. This is ok. Sometimes you may need to pivot or redirect, but what you should avoid is allowing your emotions to get the best of you. Famous investor Warren Buffett goes as far as to say, “The most important quality for an investor is temperament, not intellect.” It is true, sometimes the smartest people in the world can make the most foolish investing decisions.
So, yes, during your personal finance journey you will most likely experience recessions and downturns, but if you approach this journey with that expectation in mind then perhaps these things won’t come as a surprise. None of us like uncertainty, but all of us are in the dark regarding what the future has in store. So, take comfort in knowing that we are all in the same boat and work hard to keep your emotions in check. Simply expect the unexpected to occur, as it most definitely will.
Step Seven – Invest in Yourself
We’ve made it! Our last step. Also, I might mention, perhaps the most forgotten and least covered step in personal finance.
For some, graduation may feel like a finish line, but I would encourage you to see it as just the beginning; a transition to a new leg of the journey. Aspire to be a life long learner. One of the most underappreciated attributes of many successful individuals is their insatiable curiosity. As Walt Disney once said, “We keep moving forward, opening new doors, and doing new things, because we’re curious and curiosity keeps leading us down new paths.”
Much of achieving your goals will hinge on your ability to save, and your ability to save will hinge on having an income that is in excess to your expenses. This means that growing your earning potential can have a very positive impact on achieving all of your goals. To expand this potential, you have to be willing to invest in yourself. Aspire to be an expert at your craft; work to make yourself irreplaceable.
Sometimes this will mean ordering a $15 book, sometimes it will mean dedicating extra time to complete a certificate, and sometimes it might even mean traveling halfway around the world to meet someone who could have a big impact on your career. Each time it will look different, but the motivation will be the same – a commitment to excellence.
Try not. Do. Or do not. There is no try.
This concludes our Graduate’s Guide to Personal Finance. As I mentioned before, this is not an exhaustive guide to all things personal finance, and I am doubtful that anything like that even exists. This guide provides a great checklist or launch point for graduates to begin improving their personal finances.
I titled this last section with Yoda’s famous quote because I believe that all of these steps are achievable, but not all of us will execute on them. It will take a commitment from you to make all of this happen. It’s not about trying, but rather about doing. Many of these steps will help you to develop habits that will have compounding benefits over time. I hope you’ve gleaned some wisdom from this guide and as always feel free to reach out with any questions.
I wish you well on your journey.