This advice is part of a series InvestorPlace.com has compiled inviting academics from across the U.S. to share their thoughts on aspects of finance that new graduates should know. Their thoughts have been presented with little to no editing. Today’s entry comes to us from Professor Stephen Schiestel, CFA, Administrative Director for the Broad College of Business, Department of Finance Michigan State University who spoke with InvestorPlace via email about financial advice for recent graduates.
I would recommend following the following five principles:
- Live below your means – this allows you set aside money to save on an ongoing basis. The more the better.
- Use debt intelligently – avoid carrying a balance on your credit cards, set up an emergency fund, and try to pay cash for most of your purchases
- Determine your asset allocation – asset allocation is the mix between the amount set aside in stocks and bonds. Being young allows for many years of investment compounding to take place. The key is to be in the markets. Have the courage to allocate most of your long-term investment portfolio to stocks.
- Keep investing simple – avoid trying to beat the market. Buy sensible index funds and you will do great on a long-term basis
- Be disciplined and protect yourself – rebalance your portfolio to your target weights (stock and bond mix), avoid trying to time the market and don’t be scared out of it when the bear comes around!
If we have learned any finance related lessons as a result of the pandemic, it is that most Americans don’t have a sufficient emergency funds to carry them through any calamities faced. A good rule of thumb is to have 3 to 6 months of expenses in a safe and secure account — a savings account at a bank or a money market mutual fund. Saving at least 10% of income, monitoring where our money goes and being disciplined with our investments are time tested strategies for a successful investment future.
It is important to look at the benefits package that an employer is offering when considering job offers. Make sure that you have some health care options, disability insurance coverage and retirement savings plans. Disability insurance is often overlooked but a young person has a higher probability of being disabled than dying.
In addition, hopefully the employer is offering a tax-advantaged retirement plan — either a 401(k) or 403(b) plan. I would want to know how long I have to wait until I can participate in the plan, does the firm provide a match and what investment options are offered. You will want to contribute at least the amount needed to receive all of the firm’s match and then ultimately try to reach the 10% – 15% of salary target.
Select the least expensive investment choices (preferably index funds) and allocate most of your investments to stocks. Young people have investment horizons stretching decades so they can afford to take on market risk.