Adulting 101 – Money Matters for Life After College
As someone who works with many retirees and -pre-retirees, I regularly emphasize the importance of preparing for life after work. You know, that magical day when you close the door to your office for the last time and leave your career to start the next chapter of your life. It’s often marked by a sense of excitement, anticipation, perhaps relief, and often a touch of uncertainty as you ponder how you’ll fill your days when every day is Saturday.
Luckily, there is no shortage of opinions on how to best prepare for this next phase of life. I’m sure you could completely fill up Cape Cod Bay with all of the books and articles that have been written about how to prepare for retirement, both financially and emotionally. And hats off to you, Cutter Family Finance followers, for over 10 years you have been tuning in every week to educate yourselves on financial matters. You know, learning and implementing good money habits is one of the best investments you can make for your future self.
But oddly enough, there’s a real lack of information geared towards the younger generations, and millennials in general. Oh sure, you can find plenty of information on where to invest your money, what the hottest new stock pick is – and even investing in crypto or other forms of digital currency. But for many who are trying to “adult” for the first time, so to speak, there’s much less guidance to help them get the right start.
Take my oldest, Maeve, for example. Hard to believe the kid is 22, a recent college graduate, and has just taken a nursing job at Duke Hospital in Durham. It’s a very exciting time for all of us and she’s thrilled to be a real adult with the career of her dreams. But with all of the excitement, the move to a new apartment, making friends and learning the job, one thing was missing – how we grown-ups handle money.
Maeve is fortunate because she has two parents who know and love to talk about money habits, so we sat down with her to get her started on the right path to money management. So with our time together this week, let’s dig deeper into ways that you too can help set your children and grandchildren up for greater financial success by educating them about the importance of basic financial education and creating good money habits.
As you can imagine – and might remember from your own experience - those just starting out as adults typically don’t have saving and investing for the future foremost in their mind. But the fact is, the earlier you start, the better. For Maeve, this meant helping her set up her first retirement account through her employer and contributing to it from every paycheck. Then, we helped her create a budget that allowed her to pay her bills and enjoy the occasional shopping spree, and also identified various investing and savings goals.
We explained that there are various ways of saving money: buying items when they are discounted is a way of saving. So is shopping around for better deals on things like auto insurance, car repairs, using generic brands instead of name brand items, and more. However, investing refers to what you do with the money you set aside. Instead of leaving it in a jar or in your normal transaction bank account, you invest when you use it to buy shares of mutual funds or perhaps investment options available in your employer’s retirement plan.
It's not surprising that young people of every generation tend to find it difficult to prioritize saving, especially for retirement. It can be strange for a millennial to start thinking about saving for retirement when they are in their early twenties and still getting to grips with the reality of their first job. In addition, many graduates also need to pay off student loans before they can begin saving, and this has become harder to do as the cost of education is out of control.
But younger people have the advantage of time, in that they can invest over a longer period, especially if they are investing for retirement. Young people who have time on their side can also tolerate higher levels of risk than people closer to retirement.
In fact, for young people just out of college, investing is a great way to “trick” themselves into saving money they might otherwise spend on non-essentials. Not everyone has an inherent disposition to save, but if they understand the substantial benefits of investing over a long period of time, it can make investing less painful and perhaps even a little fun. Starting early can give young adults a significant leg up that could translate to hundreds of thousands of dollars or more in returns over their lifetime.
The more time you have between making your investments and cashing them in, the bigger risks you can usually afford to take. Big risks can translate to big rewards, but they can also lead to big losses, so it’s important to take these chances while you still have time to make up for a move that may go wrong.
Another benefit to starting early? You can invest small amounts now and end up with the same amount of money (or more) as someone who had to invest much more because they started later. Compound interest can really add up. The money that you’ll earn from continually reinvesting your money can make a sizeable difference in your overall returns.
Most young adults don’t really need a complete financial plan yet. Rather the focus should be on creating good spending, budgeting and investing habits. It shouldn’t be necessary to prioritize investing over paying rent. I advised Maeve to start with 10% of her income now and then gradually increase this percentage over time as your income rises.
Transitioning from college student to an adult embarking on a career can be a challenging time, but Maeve is up for it and all of the rewarding experiences it brings. Help you young adult create a game plan for their post-college life to help set yourself up for the best chance of financial success while time is on their side!
And as always - be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. Insurance offered through its affiliate, CutterInsure, Inc.
We do not offer tax or legal advice. Jeff can be reached at jeff@cutterfinancialgroup.com. This information is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain a better understanding of the subject of the article. Different types of investments involve varying degrees of risk, including the potential for loss. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. Market data and other cited or linked-to content is based on generally available information and is believed to be reliable. Cutter Financial does not guarantee the performance of any investment or the accuracy of the information contained in this article. Cutter Financial will provide all prospective clients with a copy of Cutter Financial’s Form ADV 2A, Appendix 1, applicable Form ADV 2Bs and Form CRS as well as the firm privacy policy. Please contact us to request a free copy via .pdf or hardcopy.
