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- "What do you wish someone had told you about money before you graduated from college?"
- "It is so important to be on top of your money because that helps relieve stress, but money in and of itself, I think now, is a tool to maximize the joy in your life. I wish I had understood that a little better when I was coming out of school.”
Among the most obvious differences between college and the so-called real world is that in the latter you ideally receive a regular paycheck. Yet shockingly few of us know what to do with that check -- big or small -- once we possess it.
"What do you wish someone had told you about money before you graduated from college?" I asked this question of Alexa von Tobel, founder of financial planning site LearnVest. She responded, “Everything."
Today von Tobel brings personal finance advice to the masses through LearnVest's digital platform and has raised $72 million in venture capital funding for her company. Yet, even as a recent grad she was no slouch. Von Tobel received a bachelor's degree from Harvard University in 2006 and her first job out of school was on the trading desk at Morgan Stanley.
"There I was, I had a tremendous education, I was so fortunate, but when I entered the real world I had so many questions.” Her questions ranged from the immediate ("What can I really afford in rent?") to the long term ("What the heck is retirement?") to the technical ("How do I keep my credit score really high?").
When I posed the same wistful question to Manisha Thakor, CEO of MoneyZen Wealth Management, she scrunched up her face and pantomimed jabbing a syringe into her arm. “They did tell me,” says Thakor, some 20-years after her graduation from Wellesley College, “but I wish they had injected it in me. Money doesn't buy happiness." After Wellesley, Thakor received an MBA from Harvard Business School and built a successful career in financial services, at one point managing $6 billion in customer assets. She clearly had financial skills but says "earning" came "at the expense of everything else in life.”
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Staying "on top of your money" is a lifelong commitment. Over the years you will have to make hard decisions, face unexpected changes and master new tools. By solving one basic equation from the get-go can make the entire journey much more pleasant. Don't worry, no knowledge of calculus is required.
The equation looks something like this: $ in - $ saved - $ out = x. Clearly you want "x" to be at least zero on a monthly basis, and ideally greater than zero over time.
Before solving for "x" let's get a few things straight. For many, the $ out side of the formula will include student loan payments. If this is true for you, an important first step is getting a firm grasp on how much you will need to pay on your debt on a monthly and annual basis. For more on this see Maggie McGrath's "5 Things You Need To Do With Your Student Loans Right Now."
Beyond student debt, however, many new grads have the luxury of a fairly clear slate. They likely don't have a mortgage, hopefully don't have much credit card debt and their lifestyle expenses are not yet set. If this is not the case for you make sure to tally your non-negotiable recurring expenses (do you own a car? are you servicing consumer debt? will you need to help your parents financially? etc.) before moving ahead. For more on types of debt watch, "Why Not All Debt Is Created Equal."
How much should I be making? ($ in) Websites like Glassdoor.com and Salary.com can help you get a feel for pay in a particular industry or city, and even at a specific company. Whether you know exactly what field you want to pursue or not, salary information will help you walk into interviews with realistic expectations (and can make the "what are your salary expectations?" portion of job applications less harrowing). Be sure to take into account the years of experience associated with a given salary figure. As a new grad you cannot expect to make as much as someone who has been working for a decade.
"It's a truism that everyone thinks they are above average," points out Jason Berkowitz, vice president of client services at recruitment firm Seven Step RPO. Adding, "We don't live in Lake Wobegon," referring to the fictional town in the radio show A Prairie Home Companion where "all the children are above average."
Berkowitz also suggests looking beyond base salary not only at health benefits, paid time off and other perks but also to growth potential. Can you expect to earn more in the future? How quickly can you expect to gain responsibility within the organization? Berkowitz recommends asking these questions of a potential employer but warns as a new grad you have little leverage so, despite the myriad negotiation tips you may find on the web, should not expect there to be much starting salary wiggle room.
How much should I be putting toward retirement? (- $ saved) Your high school math teachers probably chirped about the importance of avoiding silly mistakes in order to get the correct answer. In the real word, forgetting or ignoring retirement is the ultimate silly mistake. You just started your first job, retirement is years away, worrying about it probably sounds absurd. Thankor explains why it's not, the retirement savings gold standard and the very least you should be tucking away:
How much should I be spending? (- $ spent) Don't let your lifestyle "eclipse what it should for that stage of life,” says Thakor. "When you head into college the last place you remember living and seeing adult life was your parents' home," points out Thakor. Before trying to live like mom and dad remind yourself that it took your parents decades to build up to that income and spending level.
To determine your appropriate spending level both Thakor and von Tobel advocate the 50-30-20 rule. This macro budgeting technique comes from "All Your Worth," a personal finance book by now Senator Elizabeth Warren and her daughter, and says that 50% of your take home pay should go to needs, 30% to wants and 20% to savings (including your 3% to 10% or more in retirement savings). Watch Thakor and von Tobel talk more about the rule:
Von Tobel points out that one of the biggest mistakes recent grads make is spending too much on rent. She recommends spending 30% of your total on rent (or 60% of your needs budget) but admits keeping rent at that level can seem impossible in cities with sky high rents. To this she says, "fine maybe go up to 35%. But here is the big key problem that you want to avoid – you want to avoid being in a situation where your rent is 50%, 60% because then that 20% for the future goes away. If you fast forward ten years I can promise that you are not going to be on track enough for the savings that you really need."
href="http://www.forbes.com/ebooks/the-forbes-guide-to-paying-for-college/?utm_source=articlelink&utm_medium=direct&utm_campaign=collegeebook">Getting into college is hard enough. Paying for it shouldn’t be. Find out how to save thousands on higher ed.
California based accountant Dan Morris recalls that in the years after he graduated from the University of Oregon he would have $75 left over at the end of the month if everything went as financially planned. He never had $75. Maybe he got a flat tire or maybe his friend offered concert tickets he just couldn't resist. For this reason Morris now recommends building a cushion into your monthly budget. If your wants budget is $750, for example, allocate $650 toward dining, entertainment, shopping, etc. The remaining $100 should be set aside in an "only touch if I have to" folder that you can pull from guilt free since it won't cause you to spend more than you make and you won't have to tap into emergency savings.
As you settle into your new job, check in regularly with your money and ask yourself three new questions: How much am I making? How much am I spending? How much am I saving?
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