6 money tips new graduates should know
These are the basic yet vital things young adults should know to keep their debt low and their net worth growing.
Editor’s note: This is an update of a column first published May 31, 2023.
The congratulatory greeting cards are nice, but let’s face it: When new grads rip one open, they really hope to find cash or a check inside.
But you should also give graduates something that endures: financial knowledge to help them build lasting wealth.
A lot of personal finance advice doesn’t change — even when the nation is worried about rising inflation, the high cost of buying a home or car, and a costly war with Iran — so I like to revisit the guidance I often give to high school and college graduates.
Poet-philosopher Ralph Waldo Emerson complained that we fail to teach students basic life skills: “We are shut up in schools and college recitation rooms for 10 or 15 years and come out at last with a bellyful of words and do not know a thing.”
How true that statement is, especially as it relates to money.
Here are six basic yet vital tips to help young adults keep their debt low and their net worth climbing.
Don’t listen to the collective ‘they’
I’m sure you’ve heard someone say: “Well, they say you need to buy a home to build wealth.” Or maybe: “Paying rent is a waste of money.”
They may say: “Don’t worry about paying off your college debt right away because it’s good debt.”
I’ll tell you who. Most often, it’s people with a vested interest in how you spend your money.
They are often wrong. They will contribute to your financial stress, making you feel like you’re not succeeding fast enough.
For instance, there’s a lot of pressure on young adults to buy a home. Until you are ready for such an expensive financial move, consider renting.
In certain high-cost areas, you may never be able to afford a home. And for some, that means renting. However, you are not throwing money away when you pay to put a roof over your head.
You are not a financial failure if you are a renter.
Don’t believe people who say there is good and bad debt
Referring to debt with an adjective is unhelpful. It’s just debt, and it can be destructive and oppressive when overused.
At a Berkshire Hathaway shareholders’ meeting, billionaire Warren Buffett was once asked by a 14-year-old which financial concepts he would recommend to young people who still have time to implement them.
Buffett, one of the most successful investors in the world, didn’t talk about investing, as many might have expected.
His advice was to avoid debt.
“If I had one piece of advice to give to young people … it would be just don’t get in debt,” Buffett said.
Don’t get used to the grace period for your loans
If you’re graduating from college with student debt, don’t wait until you have to start repaying the loans (for federal loans, typically six months after graduation) to figure out what you owe.
The grace period is a time to practice. Use this time to see how those payments will affect your monthly budget.
For whatever time you have before the payments kick in, put that monthly amount into a savings account. Get used to having less to spend because of the loans.
Don’t just focus on the monthly payment
Always look at the totality of what you’re borrowing. By that, I don’t just mean whether you can handle the monthly payment and the interest you’re charged.
What will that loan cost you over the long run?
Consider what else you could do with that money if you weren’t constantly servicing debt.
If you borrow too much for a car, that’s money you can’t invest. If your mortgage is too high and overextends your budget, you can’t build an emergency fund for when life happens.
Don’t treat your budget like an adversary
Treat your budget like a love interest. Stay connected to it. Change when necessary and appropriate to make things work.
If you don’t know the song “And I Am Telling You I’m Not Going,” go find it on YouTube. I like Jennifer Hudson’s version from the movie “Dreamgirls.”
Here’s how it starts: “And I am telling you, I’m not going. You’re the best man I’ll ever know. There’s no way I can ever go. No, no, no there’s no way. No, no, no, no way I’m living without you.”
Now replace the words “best man” with “best budget.”
That’s how you should approach your budget.
No, no, no, no way you should be living without it.
Don’t keep saying ‘I don’t know’
Me: What’s your total student loan debt?
Young adult: I don’t know.
Me: What is the difference between gross pay and net income?
Young adult: I don’t know.
Young adult: I don’t know?
Financial illiteracy can keep you broke or hinder your ability to grow your wealth.
There’s a point in your life when ignorance about your personal finances is a choice, and it’s one that won’t serve you well.
Children can say they don’t know because they typically have parents or guardians who are supposed to know for them. But by the time you graduate from high school or college, you have to take responsibility and learn as much as you can about budgeting, credit, saving and investing.
You can no longer afford to say “I don’t know.”