The first real paychecks after graduation can feel life-changing after living on a college budget. The temptation to spend newly earned money is real but can come with some significant downsides, such as increasing overall debt load, prolonging potential retirement, and preventing new graduates from living a sustainable lifestyle.
Here are a few ideas to help set up new graduates for long-term financial freedom.
Get set up for financial success
Before graduates can consider investing their earnings and income to live a financially independent lifestyle, a few important things need to happen.
Set a Budget
It’s not sexy, but it’s the best foundational financial management tool available to new graduates. Budgeting gets a bad reputation, but it can reshape a financial situation, and it takes only a small effort to set up and maintain.
A budget is simply a tool for organizing income and expenses. There are lots of tips and tricks for setting up a budget that works for different financial situations, but here are the top things to know about setting up a budget:
- Fixed expenses – These are recurring expenses that don’t change over time – student loan payments, rent, car payments, insurance, even the Netflix subscription.
- Variable expenses – these are expenses that change from month to month, like utilities or food.
- Total expenses – combined fixed and variable expenses.
- Total monthly income – income from all sources, including jobs and any “side hustles.”
- Disposable income – the money left over after subtracting taxes from income.
Other budgeting strategies include
- Understanding the impact of credit cards on a monthly budget and credit score.
- Carefully consider purchases outside of the current budget, the source of the money for the purchase, and the final total cost – including interest payments if paid with a credit card.
- Plan purchases and discretionary spending in advance. Rushing to purchase items and feeling the need to “Keep up with the Joneses “ could derail a budget and future savings and investment plans.
Following a budget can lower debt, increase funding for investments, and reduce stress.
Pay down debt
New graduates will likely enter the workforce with debt. Roughly 70% of recent graduates will carry some kind of student loan debt, and they may have additional types of debt, including credit card debt or car loans.
Some debt is unavoidable, but all kinds of debt aren’t equal, and sometimes waiting to pay off all debts before investing isn’t the right move for long-term financial success. The general debt rule is to pay off revolving or credit card debt and balances before allocating money to taxable investment accounts. Credit card interest rates are high and will outpace most investment returns.
Some fixed-period or installment loans will allow for prepayment or early payoff without a penalty. Evaluate the interest rate to determine if paying a fixed debt off early is the right path and focuses on eliminating the higher interest rate debt.
The most important thing to remember about paying down debt is to avoid accumulating more unnecessary debt, especially high-interest rate credit card debt.
Establish an investment goal
New graduates sometimes know they want to invest, retire, or become financially independent at some point in their lives but finding that starting point is sometimes tricky.
Here are some general guidelines when helping define a financial goal set on achieving financial freedom.
An investor’s age will help determine the correct asset allocation (or finding the balance between risk and reward and choosing specific investment vehicles to match) and the amount of money needed to reach future goals.
Younger investors typically have lower incomes and can’t afford to make larger financial contributions than investors further into their income-generating years but have longer to close the gap by investing in smart, long-term investment vehicles.
It may be tempting for new graduates to use disposable income on short-term expenditures, like entertainment, vacations, and even that large screen TV, but recent graduates can also direct at least some of their disposable income to long-term investments to reach financial goals faster.
Retirement savings goals
Depending on the investor’s goals, retirement and financial freedom or independence may be tied together, or they may be different and distinct goals.
Whether these goals are tied together or separate, it doesn’t take much to save for retirement – younger investors can save as little as $200/month and realize a substantial investment by the time they reach retirement age.
There’s no right answer when defining how much should be saved every month or year for retirement; it depends on the individual investor, their income and financial situation, and their personal retirement goals.
Taking advantage of employer-sponsored retirement options is an easy way to allocate pre-tax income to a retirement account without remembering to make monthly contributions.
Employer-sponsored retirement accounts have maximum contributions limits investors who want to contribute to their retirement goals above and beyond this limit can open an IRA or seek additional long-term investments such as mutual funds or REITs.
Different investment strategies to help reach financial independence
New graduates who are looking to achieve financial freedom have several different long-term investment strategies available to them. Some are easy and require little effort, and some involve more research and hands-on management. There are good investment strategies for every investor, no matter how much time or financial education they have.
“Free money” with a company-sponsored 401(k)
Many employers offer an employer-sponsored retirement plan, usually a 401(k) or Roth 401(k). They provide employees a way to save for their retirement, and many companies will offer a match to employee contributions, usually $0.50 to the dollar up to 6% of the employee’s annual salary.
Play the long game
Whether the investment goal is retirement, financial independence, or simply to grow personal wealth, a successful investment strategy reaps real rewards over the long term.
The odds of a single stock purchase going gangbusters and making overnight millionaires are low, and most investors are focused on the long game and accruing wealth over the years.
It may be hard to wait for long-term investments to mature, and there may be market fluctuations, economic impacts, and other factors that could impact investments in the short term, but smart investors ride out the bumps and keep their longer-term goals in sight.
Find the right asset mix
Every financial advisor, blogger, and seasoned investor has their opinions about what the right mix of assets to generate massive long-term returns looks like in a well-balanced portfolio. But every investor is different and should tailor their asset mix to their goals and risk tolerance.
Here are some types of common long-term investment assets
Stocks and Stock Funds – not commonly thought of as a long-term investment strategy, but the right type of stock investment could prove lucrative over the long term. These investments are professionally managed or managed by the individual investor, depending on the stock or fund.
Bonds and bond funds – these interest-bearing securities typically have terms longer than ten years. Their risk is generally low, but their returns may also be lower than other investment options. These investments are professionally managed by the individual investor, depending on the bond or fund selected.
Mutual funds – These types of investments serve as portfolios for a combination of stocks and bonds. Technically, these aren’t investments themselves, but they serve as portfolios of different stocks and bonds. They are professionally managed, or they can track popular market indexes.
Real estate – A favorite long-term investment by investors, real estate may seem like a counterintuitive investment for a recent graduate. Still, there could be real advantages for this type of investment, especially if the investor is handy and wants to invest their “sweat equity” and financial resources or is willing to be involved in the day to day management of tenants and maintenance.
REIT – A Real Estate Investment Trust (REIT) is another long-term investment real estate option that could offer a lower financial barrier to entry for new graduates with the benefit of being a more passive or “hands-off” type of investment. Ideal for investors who are time-constrained or lack the desire to get involved in management or tenant issues, a REIT is professionally managed and could provide passive income that can be issued as dividends or reinvested and grown over the long-term. REITs provide income through regularly issued dividends, which can be issued as cash or reinvested in the REIT, and appreciation of assets long-term
Financial Independence, Retire Early (FIRE or FI/RE or even FI) is a popular financial movement that encourages extreme savings, up to 70% of income. The funds accumulated from saving are then invested, with the ultimate goal is for the investor to live off of small withdrawals or dividends from their portfolio. This movement encourages investors to let their money work for them while they work towards financial independence.
While attractive to new graduates, it may be challenging for them to save at the recommended rates due to lower initial incomes early in their careers and because many carry student loans and other related debts.
Recent graduates may not be able to see the light at the end of the investment tunnel but assessing their current situation, making a budget, paying down debt, and taking advantage of easy money opportunities while looking to future goals is the smart way to start building long-term wealth.
About Upside Avenue
For decades, the ultra-wealthy and financial institutions have been putting their money to work in real estate—now with Upside Avenue, you can too. We provide access to a professionally managed, diversified portfolio of income-producing multifamily real estate for as little as $2,000. Learn more about the Upside Avenue Multifamily REIT with targeted returns of 10-15% IRR.