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The one thing I would teach a recent college Grad

written by Bob Lotich, CEPF® | Investing, Saving Money

The one thing I would teach a recent college gradIt is so SIMPLE to retire well off, if you make just a little sacrifice now.

The alternative is making a huge sacrifice later on (in your 40s) and still probably not doing as well as if you made a small sacrifice now.

You just finished your degree and you are probably looking for your first “real” job.

This is the perfect opportunity to decide how you would like your financial life to be.

You have the choice to spend and buy whatever you feel like which will likely put you in heaps of debt.

If you choose this path, you will be in good company. You can be sure most of your peers will take this path.

Or, you can take the road less traveled. You can be one of the “weird” people out there who refuse to believe that they have to be in debt all their lives. You can get motivated by the thought of the freedom that comes with being debt free.

This road can sometimes feel like a lonely road, when everything and everyone around you is yelling, “Spend! Spend! Spend!” But, be assured, those who go down this road get the last laugh. They experience freedoms that most people only dream of.

If you are like I was, you will think, “oh, I can spend now, because I will be making more money later.” Well, the truth is that it doesn’t matter how much money you make. Expenses rise to meet income. So, as your income increases, you can be sure that, by default, your expenses will increase as well. Believe it or not, there are people out there with $500K annual salaries filing bankruptcy and in the same moment, you have people who never made more than $50K a year retiring as millionaires. It is not about how much you make. It is about how much you keep.

So, I say all of this to say, if I could teach a college grad only one financial lesson it would be to:

Max out your Roth IRA for five years

By maxing out ($4000 for 2007 and $5000 for 2008) your Roth IRA for the first 5 years after you graduate – you will likely have over $24,000 by the time you are 27. If you add NOTHING else to it, when you are 67 and ready to retire it will be worth over $1,000,000 (assuming 10% growth). If you can keep adding to it, you can really watch the puppy grow!!

But don’t wait, if you wait until you are 27 to start rather than 22 – the million is now down to $675,000 when you retire. Still not bad, but definitely not a million. And if you wait just 5 more years until you are 32 – you are looking at about $415,000 when you retire. So, you can see the importance of doing this right away – no matter what age you are. You can make this retirement figure a lot larger if you keep adding to it, rather than just doing it for 5 years.

Figures calculated with the savings calculator at CNN.com.

Invest the money in an Index fund

Buy an Index fund that follows the S&P 500 – The average performance of U.S. stocks over the last 80 years is over 10%. You may find a few stock mutual funds that occasionally beat the index, but very few consistently beat the average. This is the big secret of the industry and the fact is that the great majority of managed stock mutual funds fail to beat the index.

Bottom line: Buy an Index fund in a ROTH IRA account, max it out for your first 5 working years and forget about it until you retire. If you can’t afford to max it out, don’t worry about it, just do the best you can. The purpose of the article is to emphasize how important it is to START EARLY!!

What I wouldn’t tell the grad (but I am thinking)

The reason this is the one thing I would teach them, is because it will probably help them to spend less than they earn – which is the KEY to financial well being. Secondly, if they can do it for five years – it will likely become a habit that they should be able to continue for the rest of their lives.

And lastly, there are a bunch of things I would love to teach the grad, but this was the lesson that got me interested enough in money to learn the other lessons that I needed to learn.

Related posts:

  1. Why I use credit cards instead of debit cards or cash
  2. 20 Ways to Organize Your Car
  3. Yieldnodes Review (my honest thoughts and results 8 months later)
  4. Our quarterly planning day for our business (checklist & our exact process)

About Bob Lotich, CEPF®

Bob Lotich, CEPF® is a Certified Educator in Personal Finance and has over 15+ years experience writing about Biblical personal finance. He is the award-winning author of Simple Money, Rich Life and has been named a top 20 social influencer in personal finance. Check out his on-demand Christian financial class for couples, small groups and churches called True Financial Freedom.

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Hi there! We are Bob & Linda Lotich. Jesus followers, authors, podcasters, and undying fans of Michael Scott.

This site contains the lessons we learned on our journey from being stingy, debt-ridden fools, to being able to reach our biggest financial goal of giving $1 million by age 40, having zero debt & a paid off house by age 31, and peace with money in the process.

Now we share our best lessons with people like you, groups, and churches with our Award-winning book Simple Money, Rich Life and our 6-week video course True Financial Freedom.

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The articles on this site should not be taken as financial advice. Please contact a financial advisor (or coach) for specific advice regarding your situation. Any references to interest rates, giveaways, deals, products, and websites are subject to change without notice. We try our best to keep the information current, but things are always changing so it may be different now than when it was first published. Also, all the pages on SeedTime help us pay the bills by using affiliate relationships with Amazon, Google, eBay and others but our opinions are NEVER for sale. Find out more here.

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