Today’s post is brought to you by friend, and fellow personal finance blogger, Jacob. Jacob is a Ph.D. student, husband and one half of the Cash Cow Couple. He and his wife and paid off nearly $20,000 of debt in 8 months on a very modest salary. They now teach others how to do the same.
I finished my bachelors degree a short while ago and my wife completed hers less than a year ago. Since then we have been working hard – paying off $20,000 of debt, and investing roughly the same amount.
It hasn’t been an easy ride and we’ve lived a joyfully simple lifestyle to accomplish those goals, but we’ve enjoyed every minute. One of the things we have noticed is that other young couples often struggle to manage their finances in the middle of a new job, often in a new city, with a multitude of other challenges. Because of that, we’d like to share a few financial tips that have worked for us.
1. Be a Saver
It’s really easy to get caught up in the latest fashion or the hottest trends. Everywhere you look, someone wants you to buy something. The TV shouts it, the radio shouts it, and your friends shout it. They’ve got new phones, new cars, new clothes, and a new home.
You want some of that too, right? Well, realize that all of that stuff comes with a hefty price tag. Namely, it will put you in massive debt. Sure, you may be able to eke out monthly payments after you begin that new job, but you’ll never have much to save.
Try a different path. One with less stuff. One that doesn’t care about the latest trends or popular opinion. After all, most of what gets purchased is replaced in a year’s time. All that remains is the empty bank account. Learn how to live a simple life that offers financial flexibility. You’ll appreciate the freedom that accompanies a high savings rate.
Once you start accumulating cash, don’t let it sit in your local checking account. Consider putting it in a quality savings account where it can at least earn a bit of interest. From there, use it to pay off debt or invest.
2. Understand Interest Rates
We notice that many people haven’t been taught or simply don’t comprehend interest calculations. The interest you’ll pay on your student loan debt should be treated the same as the possible interest earned from your investment account.
In other words, paying down a loan with a 7% interest rate has the same financial consequences as investing those dollars and earning a 7% rate of return in the stock market. So unless you think you can absolutely beat a 7% return, pay off the debt.
To take it one step further, credit card rates are often 15% or higher. That means you shouldn’t be investing at all until you have the balance paid in full. Good luck trying to find an investment that guarantees a 15% rate of return. Hint: It doesn’t exist!
3. Understand Investing
I don’t have time to write a primer on investing in this post, but I’ll paint out the basics. When you decide it’s time to invest, there are two things you must understand – diversification and fees.
Modern finance theory suggests that an efficient investment portfolio is highly diversified. It includes ownership of hundreds – or even better – thousands of companies via common stock. Additionally, it should probably hold a wide array of bonds and a few other assets that aren’t highly correlated with stocks.
You might ask, how can you own thousands of companies or bonds? Index mutual funds or ETFs. In fact, you can easily own the entire stock market in one simple ETF! Revolutionary stuff which brings us to our next point, fees.
The other advantage of “index investing” is low fees. If you were to pay a mutual fund manager to choose your investments, it would likely cost you 1% or more of your portfolio in ongoing fees. Index funds are much, much cheaper because they don’t have to be managed. They just track a computer based index, such as the Russell 2000 or S&P 500.
The truth is that the only reliable measure of performance in a diversified portfolio is fee structure. Lower fees leave more money in your pocket and more money in your investment account to grow over time.
If you’re looking for a place to start investing, we are big fans of Vanguard and Motif Investing. Both have some great educational articles on building a high quality portfolio and both offer access to a multitude of low fee ETFs.
Do you have any other advice for recent graduates?
Image: David Goehring