This advice is part of an InvestorPlace series inviting academics from across the U.S. to share their thoughts on aspects of finance that new graduates should know. Their words have been presented with little to no editing. Today’s entry comes to us from Jesus Salas, an associate professor for the Perella Department of Finance at Lehigh University, who spoke with InvestorPlace via email about financial advice for recent graduates.
I will share some rules of thumb: first, a graduate’s rent should be no more than a third of your gross salary.
Second, you should contribute as much as possible to any 401-K retirement plan that your employer may provide. At the very least, you should contribute whatever you need in order to maximize the employer match (many employers will match employer contributions to a 401-K to some degree). Graduates will be very happy that they took advantage of employer matching of 401-k contributions. That should be the most important priority for all recent graduates. Investments to retirement made early in your employment career will have the biggest impact later in life. This is because your retirement account grows faster if you invest more early in your employment.
Thirdly, graduates should save up at least 1-2 months of salary in cash in your checking account.
Fourthly (and finally), pay your credit card bill and required student debt bills fully every month! What you do with the rest of your money is up to you!
President Joe Biden may forgive $10,000 of college debt. Therefore, after following my recommendations, if graduates have more than $10,000 of college debt, it could make sense to start paying down some of the college debt. However, it really depends on the interest rate on that debt.
If the rate is lower than 4%, then I would not say that it is urgent to pay down the principal. The recent graduate probably should pay down the principal if the interest rate is higher than 4%. If the graduate has the extra money, it’s not a bad idea to pay down the principal (as long as the balance is over $10,000).
In terms of investing, just put your money into a diversified fund – either a mutual fund or an ETF (whatever is easier for you). There is no need to complicate things. Whether you choose a global equity fund or a US equity fund, graduates in their twenties will do just fine in the long run by sticking to an all equity investment for your first 30 or so years after you graduate from college.
I would suggest that recent graduates stay away from online investment blogs or forums. I would also discourage recent graduates from investing in special purpose acquisition companies (SPACs) or cryptocurrencies. There’s no need to invest in these risky strategies. Recent graduates should consider these to be gambling. I don’t believe it is wise for students to gamble with their life savings.
I consider an all-equity investment to be a high-risk, high-reward investment. Any investment with more risk than an all equity-investment is, in my opinion, gambling. I would not recommend that the recent graduates take on more risk than the one in equity markets. I understand I may sound boring, but in the long run, the vast majority of recent grades will be content with my boring suggestions.
You can find the next installment of “Money Moves for Recent Grads” here.