The congratulatory greeting cards are nice, but let’s face it: When new grads rip one open, they really hope there’s cash or a check inside.
But what we should be giving graduates is something that will endure — financial knowledge — that will help them build lasting wealth.
Since a lot of personal finance advice doesn’t change — even when the nation is freaking out about the possibility of a government default — I like to revisit the guidance I often give to new high school and college graduates.
It goes back to the poet-philosopher Ralph Waldo Emerson’s complaint about our failing to teach students basic life skills: “We are shut up in schools and college recitation rooms for 10 or 15 years and come out at last with a bellyful of words and do not know a thing.”
How true that statement is, especially as it relates to money.
Here are six basic yet vital tips to help young adults keep their debt burden down and their net worth climbing.
Don’t listen to the collective ‘they’
I’m sure you’ve heard someone say: “Well, they said you need to buy a home to build wealth.” Or maybe: “Paying rent is a waste of money.”
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They may say: “Don’t worry about paying off your college debt right away because it’s good debt. Invest instead.”
Who are “they?”
I’ll tell you who. Most often, it’s people with a biased interest in how you spend your money.
They are frequently wrong. They will contribute to your financial stress, making you feel you’re not succeeding fast enough.
Lenders and real estate professionals need home buyers. But until you are ready for such an expensive move, rent.
In certain high-cost areas, you may never be able to afford a home. And for some of you, that’s okay. You are not throwing money away when paying to put a roof over your head.
And yes, eventually, you want to invest so that you have a chance of your money beating inflation. But if you are leaving college with debt, tackle that first. You still have time to invest.
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Don’t believe people who say there is good and bad debt
Referring to debt with an adjective is unhelpful. It’s just debt, and it can be destructive and oppressive if overused.
At a Berkshire Hathaway shareholders meeting, billionaire Warren Buffett was asked by a 14-year-old what financial concepts he would give young people who still have time to implement them.
Buffett, one of the most successful investors in the world, didn’t talk about how to pick the right individual stock, as many might have thought he would.
His first tip was about avoiding debt.
“If I had one piece of advice to give to young people … it would be just don’t get in debt,” Buffett said.
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Don’t get used to the grace period for your loans
If you’re graduating college with student debt, don’t wait until you have to start paying back the loans (for federal loans, typically six months after graduating) to figure out what you owe.
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The grace period is a time to practice. You need to feel the pressure of how those payments will affect your monthly budget.
For whatever time you have before the payments kick in, put that monthly amount in a savings account. Get used to how it feels to have less to spend because of the loans.
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Don’t just focus on the monthly loan payment
Always look at the totality of what you’re borrowing. And by that, I don’t just mean whether you can handle the monthly payment and the interest you’re being charged.
What will that loan cost you in the long run?
Consider what else you could do with that money if you weren’t servicing debt all the time.
If you borrow too much for a car, that’s money you can’t invest. If your mortgage is too high, overextending your budget, you can’t build an emergency fund for when life happens.
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Don’t treat your budget like an adversary
Ever been in love?
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Treat your budget like a love interest. Stay connected to it. Change when necessary and appropriate to make things work out.
If you don’t know the song “And I Am Telling You I’m Not Going,” go find it on YouTube. I like Jennifer Hudson’s version from the movie “Dreamgirls.”
Here’s how it starts: “And I am telling you, I’m not going. You’re the best man I’ll ever know. There’s no way I can ever go. No, no, no there’s no way. No, no, no, no way I’m living without you.”
Now replace the words “best man” with “best budget.”
That’s how you should view your budget.
No, no, no, no way you should be living without it.
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Don’t keep saying ‘I don’t know’
Me: What’s your total student loan debt?
Young adult: I don’t know.
Me: What is the difference between your gross pay and net income?
Young adult: I don’t know.
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Me: What’s FICA?
Young adult: I don’t know?
Financial illiteracy will keep you broke or impede your ability to grow your wealth.
I’m going to need you to know some things.
There’s a point in your life when ignorance about your personal finances is a choice, and it’s one that will not serve you well.
Children can say they don’t know because they typically have parents or guardians who are supposed to know for them. But by the time you graduate from high school or college, you have to take responsibility and learn as much as you can about budgeting, credit, saving and investing.
You can no longer afford to say “I don’t know.”
