Note to Graduates: Robots Will Not Help You Save

As I prepared for my life after college in 1983, the 10-year U.S. Treasury was yielding 10.4%, inflation was ragging, and the unemployment rate was 10.8%.  Putting this into prospective, 10-year Treasuries and the unemployment rate are hovering at 2.1% and 4.4% respectively. The unemployment rate, even during the debts of the recent Great Recession never rose above 10%.  1983 wasn’t a good time for job hunting  or locking in a mortgage for that matter.

My commencement ceremony overlooking Lake Cayuga was suddenly moved indoors due to a sudden snow fall in May.  So any symbolic clearing of the cold Finger Lake weather or the economic gloom would have to wait.  I was going to have to get my finances in order. I also knew that my first job might not be my career.

The amount of my college loan was approximately 90 percent of my first real salary.  That is pretty consistent with today’s grads with the average student loan debt at $37,000 and an average starting income of $49,000.  Of course, averages can be misleading.   As my colleague Chuck Lieberman is quick to point out, “If you place one hand in ice water and the other in boiling water, on average you feel pretty good.” The reality is that most students today have far worse loan ratios than we did 34 years ago.  I recently did a financial workshop for graduates from the University of Texas Medical School. These poor kids have an average $200,000 in loans and $8,000 in credit card debt.

With this in mind here are my top four financial tips for grads:

1. Try to aggressively pay off your student loans, even before you begin investing. Your 6-9% percent student loan interest costs will trump anything you can consistently earn investing. Always use any available cash to reduce expensive debt if possible. Your net worth doesn’t care if you are reducing expenses or growing assets to gain wealth. Both actions will get you to the same higher ground.
2. Begin to build a reserve fund. Make your first goal $500, then ultimately try to put away half of your annual income. This money is not to be used to pay off debt or to invest. It is kept liquid for emergencies. Once you can start to invest, it will provide a buffer so that you can stay invested. Investing tends to get sidelined when money is needed for car repair. A solid reserve fund can keep you from liquidating investments at the wrong time, which is why most investors fail.
3. Stay away from credit card and consumer debt until you have your reserve fund and you are funding a Roth or company sponsored retirement plan such as a 401K. With the average card debt now at $5,800 for people under 34 years old, it can derail a young person for a lifetime. Credit card debt is not deductible like mortgage debt and should be paid off each month. If you think your student loan debt costs are high, then check out the fine print on your credit card fees when you miss a payment or keep a balance.
4. If an employer is matching a percentage to your contributions in a 401k, then be sure to contribute. Other than an inheritance, the lottery or an insurance payout, there aren’t many other ways that money will come your way “free”. Remember you can always take your 401K money with you when you leave an employer by rolling into another 401K plan or your own IRA rollover.

My bonus tip for grads is less financial and more of my life experience.  My commencement speaker 34 years ago was famed science-fiction author and futurist Isaac Asimov.  Mr. Asimov originated the term “robotics” which was a recurring theme in his celebrated science fiction books.  Asimov spoke to us of a world where robots would replace the menial jobs thus making our lives less hectic.  He said that new gadgets like the fax machine and a company named Federal Express would enable us to work and shop from home one day.

As my college days were ending, Apple was backing trucks into the quad giving away something called “personal computers” and my professors were giddy about an academic network called “the internet”. We were told that despite the current economic woes, our generation would have the most time for leisure and a possibility chance of a utopian society. Oh, I may have forgotten to mention it was a liberal arts college.

5. Life will surprise you.  Very smart people will get things wrong (or half right) so be prepared, be frugal and enjoy the ride.

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