How to help your loved ones start their future on the right foot
Looking for financial advice for a college graduate close to you? Those who are just starting out their careers are facing unprecedented challenges, but these tips can help set them on the right path and assist them in navigating what’s next.
We can all picture the quintessential college graduation: cap and gown, “Pomp and Circumstance,” loud cheers of congratulations to a new class of young adults entering the workforce. For the past few years during the pandemic, however, this hasn’t been the case. Recent college graduates have not only faced disruption to daily life, but they are also staring down a difficult financial landscape on which to find their footing.
New hiring isn’t yet back to pre-pandemic levels, and many recent graduates are starting off with significant college debt. In 2020, the average college student who took out loans graduated with more than $30,000 in debt.
Yet not all is bleak. The CARES Act passed into law in March 2020, provided relief to student loan borrowers, and there has been a mid-pandemic pause on both federal student loan interest and collections for borrowers who have defaulted on their loans.
Young adults are up against some significant challenges and could likely use all the help they can get. While cash may be king, passing along your own financial experiences and knowledge could help them create a long-term plan for a successful start to their adult life. If you’re not sure where to begin the conversation, here are some key pieces of financial advice for college graduates.
5 Pieces of Financial Advice for College Graduates
1. Cast Out Comparisons
Part of the appeal of graduating from college is that no matter what happened during the undergraduate years, you all enter the next phase of life with one thing in common: a degree. But the competitive spirit can sometimes cast a shadow on that equitable foundation. Who lands the most lucrative job, who purchases a home first, who has the most prestige—all those things can seem to hold weight when you’re just starting out in your career.
Comparisons are rarely helpful, though. According to research prepared by Sarah Newcomb, a behavioral economist for Morningstar, measuring yourself up against your peers, especially people whom we perceive as doing better than we are, is detrimental to our overall financial wellbeing.
Her study states: “Frequent, upward comparisons… were associated with higher financial stress, lower satisfaction, lower savings, and overall, more negative feelings about one’s own financial life.”
Going further, research found that study respondents who chose to forego peer benchmarking, and instead partnered with a financial role model, were more likely to feel confident about their ability to meet their goals and ultimately succeed.
The know-how and why to get past the comparison trap is one of the best pieces of advice you can pass along to a recent graduate and serving as a financial role model could be particularly powerful.
2. Don’t Be Afraid to Use Your Safety Net
Many new graduates can take advantage of a familial safety net as they try to find their footing. Though it’s natural to dream about leaving the nest to discover your own way, even a few months of saving up money can make the next phase of life immeasurably easier.
The pandemic taught us all a lesson: to prepare for the unexpected. There are steps young adults can take—like purchasing health, disability, and renter’s insurance—to safeguard against the downside. Even without those measures, it’s always a good idea to have a small financial cushion to help with unanticipated expenses.
A common rule of thumb to pass along: you should have three to six months’ worth of living expenses set aside in your emergency fund. That can seem daunting for recent graduates but reinforcing the reason behind it can help make it seem more manageable. It should encompass the most basic expenses, like housing, transportation, food, utilities, and insurance—anything else is a bonus.
3. Let ROI Be Your Why
When you’re a new college graduate in search of financial advice, the options ahead of you can feel overwhelming. It can be difficult to understand what to prioritize and when. Should you pay down student debt, or get earnings working in the market as soon as possible?
There’s no one-size-fits-all answer to what the best return on investment might be, but it’s usually wise to pursue both paths in moderation—lower student debt and invest. New graduates have the big advantage of having a long time horizon, which makes stocks within a tax-sheltered framework (like a 401(k) or IRA) particularly attractive. They have one of the highest potential long-term returns of any possible allocation.
Introducing these tax-advantaged tools to new grads, and helping them determine a savings strategy, can be a valuable way to help.
4. Think Big, Start Small, Don’t Stop
Investing might sound like a daunting prospect to the uninitiated, but many new grads would be surprised at how little it takes to get started, and how big of a difference those investments can make.
- a $1,000 seed investment, with an additional $100 each month, earning a not-unreasonable 7% rate of return, would mean $280,000 in 40 years.
Putting those graduation gifts to good use now can yield some significant long-term benefits. Having long-term goals can help maximize those initial investments even further by helping to weather market volatility.
While markets have seen strong growth for the last decade, the future is uncertain at best. Finding ways to cope with market fluctuations by focusing on your long-term investment goals and understanding that there is no way to “beat” the market is a helpful reminder to all investors. Share those tips with any new grad who is getting started on an investment journey.
5. Invest in Yourself
Investing in yourself is a great way to ensure lifetime success. When you’ve just wrapped up one collegiate chapter, it may not seem like the right moment to invest in additional education. To that point, many law schools and MBA programs require enrollees to gain real-world work experience before enrolling. It doesn’t need to cost an arm and a leg, either—many certifications and designations can lead to salary increases without the oversized expense. If an advanced degree is on the agenda, many employers offer tuition assistance.
Another great way for a new grad to invest in their future: figure out the correct time-on-earth allocation to suit their needs and values. Help them examine their personal priorities: family, travel, friends, personal development, or some other passion. Whatever it may be, balancing financial asset interests with an investment in themselves as a person is always a worthy enterprise.
Help a Recent College Graduate in Your Life Start Out Financially Strong
Navigating finances as a recent college graduate is no small feat. Help those in your life by sharing the above advice and being available to answer questions as they begin their journey in the working world.
While a large-scale financial plan from a financial advisor may not be necessary for a recent college graduate, there can be a benefit in speaking with one to discuss ways to optimize retirement plan contributions, portfolio selections, insurance choices, and tax deductions. We often help our clients’ grown children get started in their career paths with a solid plan. For more information contact Wilson Ashe Wealth Advisors at our Providence, RI office by emailing advisor@wilsonashe.com, or to schedule a complimentary discovery call, use this link to find a convenient time.
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