College graduation is a big deal. Four years of post-secondary schooling are over, and it’s time to fully break into the world of adult responsibilities. I’ve frequently seen recent grads make a number of early mistakes, and I would like to help future college graduates avoid them.
I primarily see two mistakes that recent college graduates make:
- Not aggressively paying off student loans, and
- Not properly funding retirement investments early on.
College Graduates and Student Loans
First, on student loans. Most college graduates have at least some student loan debt. The average was nearly $30,000 per borrower for the class of 2019. What has often happened with my clients is that after graduating, they went on an income-based repayment plan (IBR) and then did not actively work to pay it off for many years.
Merely paying minimums on student loans is insufficient to get rid of them. Because of how the interest capitalizes, these balances frequently do not go down. Amounts frequently go up in these cases because of how the interest compounds. This can lead to a cycle of making payments that go nowhere for years and years.
I had one person a couple of years ago who borrowed $60,000, but made only minimum payments for a few years and deferred several times. After 10 years, the balance was over $100,000. If borrowers want to actually pay off their balances, it is critical to be very focused and intentional right from the start.
This means making sacrifices. It means working extra for a time. And it means temporarily saying no to some things. But these short-term sacrifices will enable college grads to do the things they want to in the future without the crushing burden of student loan debt.
College Graduates and Retirement Investing
Second, on retirement investing. When a recent college graduate starts working, retirement is often not even on the radar. For those who are debt-free, I advise doing 15% of your income into retirement, using the 401k and IRA. If you have it available, choose Roth to get the maximum long-term shielding from taxes on the growth of your investments.
I will qualify this by saying that I do not advise investing until becoming debt-free. Trying to do both things at the same time can hamper your efforts and make it harder to get the results you want. By focusing intensely on each thing in a specified order, the results will be more powerful because of the more concentrated efforts.
This means the sooner that the student loans are gone, the sooner recent college graduates can start investing steadily over most of their working lifetimes.
The sooner one starts, the longer the contributions will compound within the chosen investments. Time is something that can never be recovered. Contributions plus time will equal wealth.
If one starts investing at age 25 and does so for 40 years, that person has a huge advantage over someone who started at age 35 and did so for 30 years. Start early, invest a significant portion of your earnings, and choose funds that meet or beat the market’s 10% annual average. Slow and steady wins the race.
What I have specified above may sound very difficult. If so, that’s because it is. There is nothing easy about doing the right things. But it is far preferable to the alternative of reaping the consequences of delaying wise decisions. Make sacrifices now so that later on you can do the things you want to do and be able to live the type of life you want.
Schedule your free Discovery Session today to knock out your student loans forever, invest wisely, and have the life of financial peace and freedom you’ve been longing for!