After the graduation invitations are sent and exams taken, thoughts of the real world fill the minds of graduating college seniors. Some of them begin to wonder how they are going to handle the next stage of life.
One of the biggest challenges that many graduates face is financial in nature. This may be the first time that they will have a full time job. They have questions about what to do with this new paycheck.
How much do I put into savings? Should I have an emergency fund? What is a 401k?
Richard Bond answers these kinds of questions on a regular basis. He is a visiting instructor of accounting and finance who teaches personal finance for the Business department at Roanoke College.
a licensed Certified Public Accountant and Chartered Financial Analyst, and his career has included public accounting, corporate banking and investment management.
Bond offers some financial tips for the Class of 2013.
RC News Blog: How would you advise a recent college graduate to make a budget?
Richard Bond: If you think about it, your starting salary is an arbitrary amount. It’s the first time someone has told you what your services are worth. Don’t build your life around someone else’s number. Rather, take 87 percent of your starting salary and guide your life on that number and save the other 13 percent. Think of this as your personal margin of safety.
The first thing that you do, if you accept a position, is to go into the employee benefits office and sign forms, like your W-4, and sign up for healthcare benefits. You will be given a piece of paper to sign up for a 401k account.I tell my students, do not pass go, do not collect $200, max it out as much as you can. If you have a company match, they are actually giving you money for your savings. There is no better return for your investment. If you put in a dollar and they match it, you have a 100 percent return with no risk. You are not going to get that in the stock market or anywhere else in the investment world.
The rule of thumb for everyone starting out is to max out your 401k and save 10 percent of your take home pay. If you can do that, especially when you are young, and you do it in the first 10 years, you have set yourself up for a financially secure future.
Make 87 percent your current standard of living and make the other 13 percent your future standard of living.
RC News Blog: What is an emergency fund, and how do you save for it?
Richard Bond: S
tart saving in another account and automate that savings. You can go to your employer and have them direct deposit a portion of your pay, and it automatically goes into a savings account that you never see with your checking account. If you are on a night out and you go to the ATM, you are not going to see that money in there. It’s not going to tempt you to spend it. It needs to go in an account separate from your checking account.
You need to set up a fund that will accommodate for six months of living expenses. If you lose your job, the landlord doesn’t care. I tell the students that it really is a form of self-insurance, because you now have a way to insure yourself against the shorter term disasters.
RC News Blog: For students who want to be more frugal, how would you suggest practical ways to do that?
Richard Bond: The term is “sweat the small stuff.” Those are the little things that you don’t think are hurting you financially. For example, if you are working and you stop at Starbucks every day and grab a cup of coffee and then, at lunch time, you get a bottle of water. Water and coffee just go down the drain.
If you could discipline yourself to not spend on the little things, you are teeing yourself to have a nice savings. [Take] $3 a day, five days a week, 52 weeks a year. That’s $780 just for water and coffee on a daily basis.
If you save $780 a year for 10 years–say you get 5 percent interest–that’s worth close to $10,000. In another 32 years (retirement), that $10,000 is worth $63,000.
That is the whole thing behind money. Every time you spend it or take your wallet out or your credit card out, you are making a choice between instant gratification and setting yourself up for financial security down the road. If you can put bottled water and coffee in context of $63,000 in retirement, it is going to make you think twice. But you don’t do that when you are pulling up to Starbucks or taking that bottle off the shelf.
RC News Blog: How should students build credit?
Richard Bond: You need credit. You are at some point going to go buy a car or a house. All of those things require established credit. What the lenders are looking for are people that can handle credit. The difference in interest rates you pay, if you have a high FICO [credit] score versus a low FICO [credit] score, is amazing. It can be as much as 10 percent or more.
have a credit card. You have to build a solid credittrack record. That track record helps your FICO score if you keep paying on time. The best thing you can do from a credit card standpoint is every month, you have to pay your balance off entirely. Things like not paying your bills on time can hurt your score. If you have a lot of cards and you carry balances on those cards and you are paying the minimum balance on those cards per month, that is a sure recipe for a poor FICO [credit] score.
RC News Blog: What is the biggest financial lesson that a graduate will learn during the first year out of college?
Richard Bond: Well, they are going to find that life is expensive. Because it is expensive, it really puts a priority on sitting down and developing a budget. From a forward thinking standpoint, you need to gear your brain to thinking in three dimensions, taking care of the mind, taking care of the body and taking care of where you are spiritually.
Feeding the mind is critical to career success. Your education is going to be continual, and you need to constantly refine yourself. You need to explore new areas of thinking. That is what employers are looking for. That is the mind.
To be a good employee you need to lead a healthy lifestyle. Employers are getting more sensitive to that. My guess is that physical fitness and taking care of yourself is going to be more important down the road because health care costs are rising. Employers want healthy people working for them.
The spiritual side gives your life a foundation with meaning. A lot of what you do financially is how you approach things from a spiritual context. If you are able to put money into its proper perspective, you can focus your time and energy on what’s truly meaningful.
My favorite quote out of the Bible is “For what shall profit a man if he shall gain the whole world, but lose his own soul.” You can chase money, and you may have a lot of things. It’s not going to get you where you really want to be.
-By Kayla Fuller ’14
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