10 Financial Steps For New Grads

Millions of college graduates are about to embark on the next stage of their lives, which for many will include their first taste of financial independence.  Too little attention is paid, however, to the subject of financial literacy, especially from young adults.

College graduates entering the workforce this month represent the last of the millennials (born 1980 -1995), a group of 80 million and a population larger than the baby boomers.  Each generation is different and millennials are characterized as well studied and for their tendency toward social responsibility and a commitment to values, with an emphasis on flexibility, life experiences, and individualism.  Less discussed are millennials’ financial behaviors and attitudes toward investing, which present a challenge and a potential crisis to be averted.

A 2015 study by Deloitte concluded that millennials tend to be risk-averse, with less than 30% of their wealth in the stock market.  In addition, millennials have an innate distrust of financial institutions (which probably reflects watching and learning from their parents and other adults through the 2008 financial crisis).  As a result, statistics from a Bankrate study in 2016 indicate that very few 18-25-year-olds invest in the stock market.

Meanwhile, we are all living longer according to the MIT AgeLab, with an average of 20 healthy years after age 60.  This demographic reality is expected to strain U.S. entitlement programs (Social Security and Medicare), which combined with the retreat of private pensions suggests that the retirement safety nets relied on by previous generations may not be as meaningful for millennials by the time they retire.

Adding to the challenge, work itself has changed with the gig economy becoming larger, the growth of 1099 income outpacing W-2 income and therefore less emphasis on structured 401(k) saving and the matching benefits associated with the latter.

All of these dynamics indicate that millennials will likely need to be even more proactive about carving out their own financial stability and, importantly, that new grads should exercise their time advantage and get into the market sooner rather than later.

So the gravity of the situation is evident and early intervention is needed, but how do we, as parents and grandparents and even advisors help?

The answer is education and simply broaching the subject as soon as possible.  In addition to laying out the realities described above, I like to remind recent grads that they need to personally take responsibility to educate themselves on their own finances.

As for some practical suggestions, you could consider sharing the following with your young adults and recent grads:

1. Start saving for retirement the moment you have income. Contribute as much, or as little as you can as soon as you can (to your employer’s retirement plan or to a self-employed plan (SEP) or solo 401(k) so you start the behavior pattern and use compounding to your advantage.
2. Invest in a way that takes into account the 40+ years you have between today and retirement. Now is the time to be systematically aggressive and not conservative.  You have time on your side.
3. Create a budget and stick to it. Learning how to budget now similarly creates a good habit, which should serve you well as you get older and finances become even more complicated.
4. Adjust your standard of living. If your parents helped pay for college and living expenses, then you may be used to a higher standard of living than you’ll be entitled to when you are on your own.  You won’t be alone so find some roommates or trim your lifestyle now to help you focus on more important financial goals.
5. Start saving an emergency fund now. As with retirement savings, start this as soon as you have income.  You can start by saving enough to cover one month of living expenses, but gradually continue to increase this to cover a longer period of unemployment if such an event occurs.
6. Pay down student loans. Putting extra money toward your student loans while you can, before you take on other large financial obligations, will be invaluable down the road.
7. Work two jobs while you’re young and able. You may not earn big bucks at your entry-level day job, but you can still get part-time gigs on nights and weekends to bring in extra income while you have the time and energy.
8. Carefully consider any real estate purchases. You’re young and mobile and there is no rush to jump in.  You don’t want to be bound to a property that you can’t sell or rent in a down market when a new job in another market comes along.
9. Be strategic in your career choices. It’s easy to be too picky starting out, but you should aim for something that you can stick with and learn from for at least two or three years as opposed to being a job hopper.  Most working adults have career paths that are constantly changing, but they don’t change jobs every year.
10. Be informed. It’s your job to educate yourself on financial matters and to be generally informed about major economic news and trends.  Don’t be afraid to ask for help.  Most planners, like me, are happy to help.  Parents that get this already know.  I talk to pending and recent college grads for the families I advise regularly.

After the dust settles, graduation offers a timely opportunity to communicate the personal financial challenges facing millennials today and, as a result, the importance of building a solid financial foundation and good savings and investing habits that can last a lifetime.

There are plenty of resources available, including your ACM Wealth Advisor, so don’t hesitate to reach out us if we can help.  We look forward to speaking with your children and grandchildren.

Advisors Capital Management, LLC is an investment advisor registered with the United States Securities and Exchange Commission. Registration does not imply any degree of skill or training. All investing carries risk, including the potential for the loss of principal and past performance is no guarantee of future results. This content is for informational purposes only, can change at any time without notice, and is not investment advice or a recommendation to trade any security. Indices are not available for direct investment. We only provide services in jurisdictions where we are registered. Our disclosure brochure (ADV Part 2A) and customer relationship summary (ADV Part 3) are available at https://adviserinfo.sec.gov and upon request.