As you sit in your cap and gown, you will be going through a range of emotions as the past four years (or, as it is now more likely, five or six years) come to a head and you are discharged into an overcrowded, competitive job market. You have listened to speeches similar to Steve Jobs’ stirring 2005 Stanford commencement address, or read the wonderful “Wear Sunscreen” graduation speech that Kurt Vonnegut never gave. No doubt a thoughtful relative or two has Dr. Seussed you with a copy of “Oh, the Places You’ll Go!”
But I want to leave you, graduates, with three simple words. These words are so important that I begin and end the courses I teach with them. “If you remember nothing from this class, remember this,” I tell my students (which is confusing for them, because I teach journalism, and the advice appears unrelated to the profession).
I do this because I sorely wish every college class I took began with these words. I wish each of my instructors had run into the classroom, grabbed me by the collar and painted my face with spittle as they shouted these words…
Pay yourself first
Oh, the financial pain you will sidestep if you simply take 10% of your first paycheck, throw it into a savings account and forget about it. Then repeat. Repeat. And repeat.
As you are set adrift into rocky economic seas, this is your life preserver. And as you see your savings grow, you will feel the warm glow of confidence rise as you battle the financial tempest that lies before you and still stay afloat.
Now, life preserver well-fastened, here are the four other key habits to build a trustworthy boat as you chart across new financial water.
Top off your 401(k) contribution
Do you want to become a millionaire? Of course you do. Here’s a slow, unsexy but sound way to do it:
When you get your first job, the head of HR will throw a bewildering assortment of paperwork at you. Somewhere in the stack is a form that sets your employee 401(k) level. Maybe you know what this is, maybe you don’t. But what you should ask the HR person is, “How do I maximize the employer contribution?” Then set your contribution so that you “max out” your employer’s contribution.
Why? These are the two sweetest words in the English language: Free money. Like paying yourself first, there will be a slight sting at first because you will be reducing your take-home pay. But do it – then forget about it. Do this early – it’s easier before you have a spouse, kids and a house – and the habit that will help set you up for life.
How could this make you a millionaire? As financial author Dave Ramsey notes: “Saving only $100 per month from age 25 to age 65 at 12% growth = $1,176,000. Everyone should retire a millionaire!”
Slay your fear of debt (or, how to make a budget)
Procrastination, dear graduates, is not a species of laziness; it is avoidance. We avoid what we fear. The greatest symptoms of fear in our financial life are unopened credit card statements, student loans and utility bills. Open them. Look at them. Know them. Own them.
Then get out a piece of paper, tally up your monthly take-home pay, subtract monthly expenses and – presto – you have your budget!
Don’t like what you see? Of course you don’t. But to move toward a better financial place, you must know where you stand. Tracking the ebb and flow of your cash is essential toward building behaviors that will lead you out of debt, rather than deeper into that abyss. And if you make a monthly budget, you will immediately set yourself apart from the pack — more than 60% of Americans admit to not having a budget.
Slay your fear of debt, part 2: Credit cards
Let’s be honest – I’ll bet some of you have woken up with morning with a blinding hangover and mysterious receipts in your pocket for unremembered rounds you purchased.
Yet what credit card companies tout is true. Using credit cards is an excellent way to build a strong credit rating. Let me suggest this trick: After you snag your first paycheck, avoid using your credit card for three months. Allow your savings account to grow. Then never use it more than you can pay off monthly and absolutely never spend on credit more than 50% of your current savings.
You’ll find that the sting that first greeted putting at least 10% of your salary in savings will be replaced by the sting of seeing that cash reserve diminish. And you will automatically – almost magically – think twice about spending more than you’re making.
What’s your grade?
Graduates, life is about to throw a cruel twist your way. You’ve spent most of your life being measured by one dominant metric: What’s your grade? Your GPA-led life has now ended, and there is only one grade that will seriously matter in your financial life: Your FICO score.
Your FICO score may not seem important to you now – some of you may be hearing it for the first time – but it will grow in importance very soon. FICO is your credit rating, scoring how safe a bet you are for banks to lend you cash for a car, a house or the college education of your future children. Like knowing the full weight of your debts, know your FICO score.
A good FICO score is built by good credit habits, good credit habits come through sound budgeting, and sound budgeting is secured by good savings habits.
In other words: Pay yourself first. All good things flow from that first habit.
Congratulations, and good luck.
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Illustration by Brian Yee.