Guidance

RESOURCES TO HELP SHAPE YOUR FINANCIAL FUTURE

While the hiring picture for new college grads has increased by 7% versus 2020, it is still not back to pre-pandemic levels. Meanwhile, many new grads are shouldering significant debt: In 2019, the typical college student who took out loans for college graduated with more than $30,000 in debt. On the plus side, the CARES Act that was passed into law in late March 2020 provided broad relief to student-loan borrowers, and the Biden administration recently extended through September 2021 the pause on federal student loan interest and collections for borrowers who are in default.

Against this challenging backdrop, new grads in your life will almost certainly benefit from any efforts to help them begin the rest of their lives on solid financial footing. That can mean cold hard cash, of course, but it may also mean imparting a bit of your own financial wisdom. You most certainly have your own bits of advice to dispense, borne out of your own experiences. To help get you warmed up, here are some key bits of financial advice to consider.

Step Away From That Comparison
Perhaps it will be different for the current crop of new grads, but there could be a certain competitive spirit among peers. Some may be especially attuned to who had landed the most lucrative job, who purchased a home first, and so on. In hindsight, those comparisons are not necessarily predictive: Some who get off to a fast start do not universally end up ahead. And in any case, comparisons are not helpful to our own financial well-being, according to research prepared by Morningstar behavioral economist Sarah Newcomb. Following a survey of several hundred people, she and her team concluded that “Frequent, upward comparisons … were associated with higher financial stress, lower satisfaction, lower savings and overall more negative feelings about one’s own financial life.” Remind the new grads in your life of this! Instead, the research concluded that the survey respondents with a financial role model (rather than those who engaged in peer benchmarking) were more likely to feel confident about their ability to meet their financial goals. Thus, one of the best gifts you can give a new grad is to discuss how you got past the comparative rat race. As Chicago Tribune columnist Mary Schmich famously wrote, “The race is long and, in the end, it is only with yourself.”

Always Have a Safety Net
Amid the current crisis, many new grads have a safety net: the opportunity to live with family as they try to find their footing with their careers and the rest of their lives. But no matter what, the pandemic serves as a great teaching tool on the importance of minding the downside. Even if new grads feel invincible, remind them that they need to insure against bad outcomes by purchasing health, renter’s, and disability insurance as their needs dictate. And at every life stage it is crucial to build at least a small financial cushion to cover unanticipated expenses. The common rule of thumb is that you should have three to six months’ worth of living expenses set aside in ultra safe investments like an online savings account, but that figure can seem hopelessly daunting to young people who are just starting out. Emphasize to your new grad that the emergency fund is meant to cover very basic expenses: housing costs, insurance expenses, utilities, and food. From that standpoint, amassing a cash cushion looks a lot more manageable.

Let ROI Light the Way
We all encounter dueling financial priorities throughout our lives, so it can be worthwhile to educate your new grad about how to balance among them, and the virtues of multitasking. One of the first big financial trade-offs many new graduates encounter is whether to pay down student debt or get their money working in the market once they begin earning money. While it might be tempting to focus on vanquishing the debt and then move on to retirement savings, in most instances it is wise to do some of both. Servicing debt is not optional, of course, and the return on debt paydown is guaranteed, whereas investing in the market is not guaranteed. With a new grad’s long time horizon, however, assets invested in stocks within a tax-sheltered vehicle like an IRA or 401(k) plan have one of the highest potential long-term returns of any possible capital allocation. Return on investment can be a valuable compass for multitaskers throughout their financial lives, helping them identify the best uses of their capital at any given point in time.

Get Started on Long-Term Investing (Even if You Are Starting Small)
In a related vein, new grads might be surprised at just how little it takes to get started in investing—and how much those early investments can add up. A $1,000 initial investment (graduation gifts!) with additional $100 investments each month for 40 years, earning a not-unreasonable 7% rate of return, would add up to $280,000. A check in whatever size you choose, an application for a Roth IRA, and some information on the power of compounding make for a graduation gift that keeps on giving. (Just bear in mind that your grad will need to have earned income in 2021 in order to contribute to an IRA for this year; if he or she is a full-time student, a brokerage account will be the better bet.)

Play a Long Game
Even as you want to underscore the merits of getting started in investing for long-term goals, it is also wise to set expectations. Stocks have been running up for the better part of a decade, but it is realistic to assume that returns over the next decade might not be as robust, and the volatility they have been experiencing so far in 2021 could persist into the years ahead. If you are evangelizing about the merits of stocks, be sure to discuss the importance of sitting tight or even adding more during the downswings. And if you have come up with your own strategy for coping with market volatility, whether it is not checking your balance or taking a walk, share it with your new grad who is just getting started.

Invest in Human Capital Before Life Gets Complicated
Many new college grads may reasonably be hesitant to invest in further education right now, given the uncertain economic environment. And indeed, many MBA programs and law schools even require enrollees to get some work experience under their belts before enrolling in their programs. But as much as new grads might enjoy the respite from homework and tests that comes along with finishing college, remind them that one of the best investments they will ever make is in their own human capital—their lifetime earnings power. And just like investing in the market, the earlier they make additional investments in human capital and additional education, the more it is likely pay off. Additional education need not entail advance degrees and/or hundreds of thousands dollars, either: Pursuing certifications and earning designations can lead to salary increases, too, and many employers offer tuition assistance for further education and training.

It is also worth noting that from a practical standpoint, many new grads are relatively unburdened with family and other obligations in their early and mid-20s, making it an ideal time to tackle further education.

Mind the Big-Picture Allocations
The preceding points have hit heavily on the importance of allocations of financial capital. But if you have a close relationship with a new graduate, share what you have learned about the biggest allocation of all: your time-on-earth allocation. Do you regret that you spent so much time at work while your kids were growing? Were you so glad that you took time away from your other obligations to be with a sick friend or elderly parent? Are you grateful you took the road less traveled, even if it cost you something in the short run? All of us are trying to balance time spent earning money alongside doing stuff that brings us joy or does good. In the end, the right time-on-earth allocation is incredibly personal and may change over time. The best advice for a new grad on this front may simply be to say that in contrast to investing financial assets, where paying less attention is usually better, the time-on-earth allocation is one that deserves frequent monitoring.

 

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