''On Your Graduation''

- Advice for Young Adults

by Charles P. Buck CFP™

As the time comes to graduate, you will be called upon to make a lot of decisions.  I want to give you some guidance that will help you fulfill your potential and make your life both personally rewarding and financially secure.  Many young adults get bogged down with trying to start their financial lives where their parents left off.  They get in over their heads in debt and lifestyle.

First, continue to invest in yourself.  You have finished one step of your education, but you will need to keep learning for the rest of your life.  Continue to pursue the knowledge, to remain current in your career field and other things that interest and benefit you. 

Live within your means.  As Charles Dickens said in 'David Copperfield', 'Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery'.  If you spend less than you make you invariably have more; so learn to save first and spend what's left.   This can be accomplished by the old adage of "paying yourself first".  Know what you can afford to spend and stay within your guidelines.

Learn the difference between good debt and bad debt.  Good debt comes from purchases that increase your growth assets or earning power; for example, an educational loan, a mortgage on an investment property or a home loan.  Bad debt comes from buying things to promote a lifestyle that you can not afford.  Credit cards are a classic example where you can get caught in a downward spiral.  Every dollar that you carry on a credit cart must be repaid many times over.   When you charge a $100 dinner and pay it off with the minimum payment; it will take you 5 years to pay off one meal, and furthermore you will pay interest of $45.  That by itself doesn't sound like a lot, but when you consider that the average college graduate is carrying $5,000 on plastic, they are selling a lot of their future to the credit card companies.

Save for your future.  Every person needs to start with an 'emergency fund' which contains enough cash to cover your fixed expenses for 3-6 months.  This will be your buffer between your credit card and life's problems that will happen.  Save a fixed amount each pay period to build your financial security.  If you don't have a rich uncle that will help, Uncle Sam will lend a helping hand.   The best opportunity is your 401K plan; especially if your employer matches a portion of your savings.  Your contribution is tax deferred and with 40+ years of tax deferral that is like an interest free loan from the IRS.  When you put a dollar into your 401K plan you don't have to pay taxes on that dollar, therefore it only costs you about 70 cents.  If your employer matches your dollar, you will have two and at a cost to your present cash flow of only 70 cents.  Now you know why I say a 401K is the best way to jump-start your savings.  The Roth IRA is another IRS supported plan, but unlike the 401K, you don't get tax deferral today; but if you meet the requirements, you can withdraw all the earnings without ever paying any taxes.

Finally, Do it now!  There is no better time to start than when you are just starting your career, you have a minimum of 40-50 years left in your working life, which is also the time you have left to build your financial security.  If you start today, and save $3,000 in a tax deferred plan, in 40 years at 8% you will have $777,000.  If you wait for 10 years you will only have $340,000. At age 40, you would need to save $17,000 per year to have $777,000.  Time at this point of your life is your ally.  That is why I say 'Do it now!'

Congratulations on your graduation and hopefully you will have a life filled with happiness and financial security.