I’m headed to my younger sister’s college graduation next week. I’m so proud of her for everything she has accomplished, and I’m really looking forward to celebrating her with our family.
I’m also curious to hear her professors’ words of wisdom as she embarks on the next phase of her life. I find commencement speeches so entertaining—either because they’re really well done or really not. Like Federal Reserve Chairman Ben Bernanke, who gave nuggets of advice to the Princeton class of 2013 (an example of the former) or Apple co-founder Steve Wozniak, who warned Michigan State University graduates in 2011 that “the cyborgs are winning!” (Whaa…?)
If I were giving a graduation speech, I’d get real. As in, what does my sister really need to know as she enters the working world? I wish someone had given that advice to me when I left college. What I really needed back then were some practical tips.
With that in mind, here’s what I’m telling my sister as she journeys into the brave new world:
- Before you sign a lease, buy furniture, or do anything else, create a budget. Check out free and easy online tools like BudgetTracker or mint.com to get started. Your budget can change with you as your income and priorities change over time (I’m re-evaluating my budget now, actually), but it’s important to set parameters on Day 1 so you don’t get yourself into trouble. (See #2 below.)
- Avoid credit card debt at all costs. That top isn’t as cute when you add extra zeros to the price tag. (And that bag of M&M’s isn’t as tasty, either.)
According to the Federal Reserve, the average American household has $7,073 in credit card debt. With credit card interest rates hovering around 12%, if you had that much debt and made minimum payments it could take you more than 20 years to pay it back and you’d pay over $7,000 in interest. Trust me—it’s not worth it.
- Start contributing to your 401k on your first day of work. If you start contributing on Day 1, I promise you won’t even know the money is gone.
Saving from the get-go is critical because the first dollars you contribute are worth so much more than contributions later in life. If you save just $100 per month (or $1,200 per year) starting now, and assume a pretty conservative return for the next 43 years (say, 6%), your contributions will be worth over $225,000 at age 65. If you wait even one more year to start saving, the total shrinks to $211,000. That means that the $1,200 you could put in now is basically worth 12x that amount. 12x! Check out this retirement calculator to play with the math or this site for more.
If you can afford it, try to save more; if your employer matches your contributions, try to at least meet their match. Your employer’s match is—no joke—free money.
It’s not as inspiring as Steve Jobs’ 2005 commencement address, or as thought-provoking as Michael Lewis’ talk from 2012, but it’s real. And that’s what you really need to hear when you’re about to get your start in the real world.