We are upon graduation season again, as evidenced by the number of announcements in the mailbox. What follows is an updated version of a blog post I wrote roughly seven years ago when my Teammates mentee was graduating high school. The advice below is timeless and applicable for all graduates, whether high school or college. At the end, I offer some additional resources that may be of interest. Before getting to the list, here’s the foundational idea that ties it all together:
Success in any endeavor is contingent upon the accomplishment of mundane but necessary tasks. In other words, it’s the small things done right, done well, and done consistently that ultimately lead to success.
With that in mind, here are five financial concepts every new graduate should know:
Compound interest – Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it…earns it. He who doesn’t…pays it.” Take advantage of compound interest by saving and investing as much as you can as early as you can. If $1 million by age 65 is your goal, you’ll need to invest $444 per month beginning at age 25, assuming a 7% rate of return in stocks (somwhat conservative historically). If you delay saving and investing until age 45, you’ll need to set aside $2,126 per month.
Net worth vs paycheck – Understand that wealth is not the same as income. Wealth is money not spent. A high income gives you an opportunity to build wealth more quickly than someone with a low income, but unless you live below your means, you’ve wasted the opportunity. It’s not how much you make, but how much you keep. Have a net worth mentality rather than a paycheck mentality. Begin tracking your net worth when you get your first job. Very few things in life are as motivating as progress.
Educate yourself – Even if you’re a business major in college, you will be underexposed to personal finance classes during your entire educational process. So, it’s upon you to educate yourself. “An investment in knowledge,” wrote Benjamin Franklin, “always pays the best interest.” If you only read one book about money, I would suggest The Psychology of Money by Morgan Housel. The reader doesn’t need a bachelor’s in finance to understand any of it. Plus, the author is a great storyteller and it’s an entertaining read.
Credit cards – There’s a right way and a wrong way to use credit cards. If you pay off the balance every month, you’re doing it right. If you don’t, you’re not. Here’s why. The average interest rate charged by credit card companies on new accounts is 22% per year. You can see who wins when you carry a balance. If you have a $2,000 balance on your credit card and make the greater of a $25 or 2% minimum payment every month, it will take you OVER 25 YEARS to pay off your card at 22% interest. Remember, you want compound interest to work for you, not against you.
“Buying” happiness – As comedian George Carlin said, “Trying to be happy by accumulating possessions is like trying to satisfy hunger by taping sandwiches all over your body.” Studies show there is a higher level of sustained satisfaction by spending money on experiences and people rather than on stuff.
The five financial concepts for new graduates can be summarized as follows: live below your means, be your own advocate, and understand the forces working for and against you.
As promised, here are a few more books to consider giving the graduate in your life:
- The Wealthy Gardener
- Your Money or Your Life
- Atomic Habits
Thanks for reading and pass along P&A’s congratulations to your graduate!
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