Members of the college graduating class of 2017 owed an average of close to $30,000 each in student loan debt. Imagine starting out adult life with that kind of debt load?
The prevalence of this type of mounting debt for a 21- or 22-year-old is unprecedented in U.S. history – and all the more reason why young adults need sound financial advice. Financial advisors might not necessarily market to this demographic; instead, waiting until they’re older and have assets worth their while. However, if today’s young adults don’t get off on the right financial footing with regard to managing debt, saving, budgeting and investing for the future, there won’t be that many in need of financial advice once they hit middle-age.
The following are a few tidbits of advice to help recent college grads develop successful money management habits.
Interestingly, many college graduates know they are in over their heads and welcome financial advice; in fact, they’re hungry for it. A recent survey found that the No. 1 goal for 94 percent of Millennials is to become debt free. Unfortunately, tackling thousands of dollars in debt while earning an entry-level salary is a difficult task. The first rule of thumb is to be patient.
It takes time to pay off that much debt. The best advice is not to develop expensive habits, such as buying an expensive car, one with poor gas mileage or a make that is known for expensive repairs. Don’t get into the gourmet coffee habit. Bring your lunch to work. These are common habits among young adults with little discretionary income, but the hard part might be refraining from this type of spending once they start earning a higher salary.
Any wage increases or monetary windfalls should be directed to paying off debt and establishing an emergency savings fund to cover three to six months of living expenses – just in case they get laid off or encounter a large, unexpected expense.
Just as it takes time and patience to pay off a large debt, it also takes time and patience for invested money to compound. Once debts are paid off, extra income should be devoted to a regular, automated savings plan, such as a tax-deferred retirement plan with a company match.
Here’s an example of the reward:
Madison starts investing $10,000 a year at age 25 for 15 years, for a grand total of $150,000. At age 40, she stops and never returns to that investment habit.
Aidan starts investing $10,000 a year at age 35 and continues that habit for 30 years – twice as long as Madison. His total contribution also is twice that of Madison’s, at $300,000.
By age 65, Aidan’s investment grows to $790,582. While Madison invested only half as much as Aidan, by age 65 her investment grows to $998,975 – $208,392 more than him (assuming a 6 percent average annual return). That’s what the power of compound interest can do for a new college graduate who starts saving young.
Compound interest works both ways, so it’s important that young adults don’t miss or make late payments on student loans or other debt. Such bad habits lead to negative information being reported on their credit report, resulting in a low credit score that can cause them to be turned down for loans or charged higher interest rates. It can even mean losing out on a job opportunity, as some employers check out candidate credit scores.
Above all else, young college graduates need to make debt payments on time, build a credit history and protect their credit score.
Ideally, no matter how large debt payments are or how little a new college grad earns, a young adult should get in the habit of saving the same amount of money each month. Even if it’s just $20 a paycheck; it’s not the amount that matters – it’s the habit.
The best way to accomplish this is to live below your means. When you get a salary increase, increase your monthly savings amount. The easiest way to entrench a savings habit is to “keep living like you’re still a college student.”