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 Stephen Schiestel, Addy Professor of Practice in Finance for the Eli Broad College of Business at Michigan State University, who spoke with InvestorPlace via email about financial advice for recent graduates.
I would recommend following these five core concepts for all graduates to focus on first:
- Live below your means – this allows you set aside money to save on an ongoing basis. You can pay yourself first (by saving). The more that you can save, 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 invested in stocks and bonds. Being young allows for many years of investment compounding to take place. The key is to be in the stock market for the long run. 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! Because we know from history that market corrections are not unusual.
It is also 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 savings vehicle — 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 on the amount that I invest 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% to 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.
You can find the next installment of “Money Moves for Recent Grads” here.