slice of koh

It’s a pretty bad time to graduate from college or any form of school.  Unemployment is hovering at 7.6% and continues to climb.  More people are in line for their unemployment benefits.   Since I was curious, I walked into a  McDonalds one morning to ask for an employment application.  The employee apologized and said that they ran out of employment applications and too many people applied.  You know times are pretty bad when McDonalds start turning away people.  This is especially challenging for recent college graduates who are just starting out and learning to live on their own paychecks.  The majority of those recent college graduates will have some sort of debt from student loans (private and federal) and credit cards.  I just graduated from college in June 2007, and I am still fortunate to be employed and paid pretty damn well for just having a bachelors degree.  Nonetheless, I am still cautious with my personal finances and definitely had a few missteps of my own in the first 12 months.

Depending on how recently you just graduated from college, I want to share my experiences and tips such that you will be in a more comfortable place in case the American economy continues to nosedive.  I will assume you still have your job at this point, but you should always be prepared in case something happens.

First 2-3 months after graduation

This is probably the time where you are waiting to start work.  I had two months of freedom before my first day on the job.  It does not mean you should blow off all of you signing bonus while travelling the world.  I did go to Korea to visit relatives; however, other than that, I stayed at home with my parents and looked for an apartment.  

1. If you are going to take a trip in between, plan the trip well in advance.  If not, there is nothing wrong with chilling at your parents’ place until you officially move into your own place.  You save money (and this will be the last time your parents will feed you).  

2. If you have any credit card debt, pay down those balances or take out a loan from your parents to pay them.  Student credit cards have the highest APRs I have ever seen.  Since they are seen as high risk, you should not be surprised to see your APR as high as 20%.  Think of it this way, if you think you are going to make 20% year-over-year return in any investment, I should hire you as a financial adviser.  If not, it’s a pretty easy decision to pay off your credit card debt. 

4. Create a budget.  Since you have all this time, you can think about your expenses.  I use Mint to track my finances and set my budget.  I can also compare my spending with national averages or people living in my city.  It even sends you an alert if you go over budget.  Another thing to note is to get a good estimate of income AFTER taxes.  I was shocked how much of my paycheck was eaten away by federal and local taxes besides my 401k contributions.  

5. Find an AFFORDABLE yet SAFE place to rent.  By creating your budget, you probably have a better idea of how much you can spend on rent (or if you’re lucky to own a place… more power to you.  You probably don’t need to read this post to begin with).  People generally say to me that 30-35% of after-tax monthly income is ideal.  Well, I disagree.  If you’re renting a place, go for the minimum that you can withstand because rent is a sunk cost.  You can use that extra 5-10% to pay off credit card or student loan debt.  If you can live with a roommate, that makes it even better.

First 6 months on the job

Now you started work and getting used to 9-5 (or 9 to midnight depending on your post-graduate occupation).   These first few months are pretty critical, but a few mistakes won’t hurt you as long as you are smart.

1. Pay off your credit card balances.  Your goal is to get rid of all those credit card debts that you accumulated during college or pay off the loan from your relatives to pay off the credit card debt.  Keep in mind that credit card balances are evil not credit cards themselves.  Get a credit card that gives you cash back for groceries (Chase Freedom is one such good card) and pay off those balances every month.  

2. Build up an emergency fund.  Especially in this economy, having a stockpile of cash sitting in an easily accessible account is important.  Ideally, you would have an emergency fund to last you for 6 months of living expenses.  I built up a fund to last me only 3 months of living expenses because I had other people I can count on if something happens.  I am starting to hoard cash right now because I don’t know what will happen in a month let alone one year.  

3. Repay student loans during deferment if possible. If you have federal loans, you will likely have a deferment period.  Perkins loans have deferment periods of 9 months after your graduation date.  Stafford loans have deferment periods of 6 months after your graduation date.  Loans do not bear interest until after the deferment period is over.   Figure out when this date is and stockpile enough cash to make a substantial payment before the deferment period is over.  This not only makes you feel a lot better but it makes your credit look a lot better too. (I saw all of my credit limits jump 50% after my initial payment.)

4. Start contributing to your 401K option (Roth > traditional).  If you don’t see the money in your checking account, you are likely not going to care.  Even if it’s just a little bit per month, you have a long time horizon ahead of you.  The difference between Roth and Traditional 401K is that Roth 401K contributions are after-tax while Traditional contributions are before-tax.  However, your earnings on your Roth 401K are not taxed while earnings on your traditional 401K will be taxed once you pull the money out.  As we are young twenty-somethings with a lot of time ahead of us and will probably make more money when we get older, Roth 401K is the smarter option.   Just choose an index fund as your option, as they have the lowest fees and don’t really need much attention.  With the markets down, this is an incredible time to have equity.  You might as well have tax benefits with the little precious money you have.

5. Start saving a little bit every month.  Saving money is really a habit.  One tactic I use is open an online savings account and set an auto-deposit that coincides with my paycheck.  If you don’t see the money, you are not going to notice.  This is a great way to build that emergency fund quickly without knowing it.

6 months-1 year on the job

At this point, you should have your money-saving groove and found the best way to manage your finances day-to-day.  It’s now time to think about investing that money while paying off your student loans.

1. Open a Roth IRA.  Like Roth 401K, you contribute to this account after-tax, and earnings are tax-free.  If you have extra money, put some of that here.  Currently, you can contribute up to $5000 for 2009.  Technically, you can still open an account for 2008 before tax day in mid-April.  Like your Roth 401K, the easiest thing to do is to put your money into an index fund like S&P 500.   You will have a diversified portfolio without even trying

2. Continue to pay off those student loans.  Try to pay a little more than the minimum payment if possible, especially on those loans with higher interest.  

3. Open a discount stock brokerage account. If you have more money left over (good for you!), then open a brokerage account online.  You can either make a lot of money or lose a lot of money, but if you’re smart, you will make more than your average savings interest rate over the long-term.  Choose well-known, familiar stocks to being your portfolio.  Owning a stock portfolio does require time and research, but it’s a lot of fun.  You’ll learn a lot more about the markets and will never be bored.

If you follow these rules, you should be in a good place 12-18 months after you graduated from college.  There is never really a right percentage to save as it really depends on your situation.  It’s most important to be debt-free or make progress towards being debt-free.  Following these rules does not mean you can’t enjoy your life.  I was able to travel and go out by doing little things such as bring my own lunch from home or not drinking Starbucks coffee.  Making little changes does bring about huge differences as long as you have the discipline to do it.