Friends, I'd like to introduce you to guest blogger Dean Junkans, Chief Investment Officer of Wells Fargo Private Bank. Over the course of his 28-year investment career, Dean has held numerous leadership and portfolio management positions—currently he leads and coordinates investment strategies and advice across the division, overseeing more than $200 billion in assets. He also enjoys speaking to clients and prospects about investing and the markets.
Today, we share an article he wrote about ways to become financially independent to for new graduates. So please welcome Dean as he presents his twelve tips for college students who are entering the workforce. (You can hear him talk about it on this podcast as well.)
And as always, once you've read through the post, if you have any questions, please ask! (—MB)
For many college students, including my daughter, the months of April and May mean final exams and graduation celebrations. If you are one of the fortunate students who have secured a job straight out of college in this slow-growth economy, your first pay check may seem large, even if you have been working your way through college. And as you enter the working world, there is often a temptation to spend beyond your means.
I am encouraging my daughter to take a long-term view, however. I would like to share the following top 12 tips that I have given her to help her establish some sound financial habits that will benefit her for many years to come.
- Live below your means. If you can maintain a frugal college student mindset the first two or three years after you get your first job,you will be amazed at how much you can save and invest. The more that you invest now, the more you will benefit from your long-term investment time-horizon to grow those assets.
- Set money aside for emergencies. Set up a separate bank account for this purpose. Try to accumulate enough money to cover three to six months of basic living expenses. Although it may not feel like it, surprisingly it is easier to accumulate this cushion now when you have fewer financial commitments than any other time in your life.
- Start retirement savings with your first paycheck. Retirement may be the last thing on your mind as you start your first job, but if you don't take advantage of your company's savings plan, you may be giving up an opportunity for free money. Most companies offer 401(k) plans that offer some level of matching contributions. At a minimum, you want to capture the full matching amount. Starting to save early can help you benefit from the power of compounding—where over time the interest you earn on your investment helps it to grow at an accelerated rate.
- Create separate savings accounts for large purchases. Never, ever withdraw money from an investment account for a purchase of a consumer product.
- Keep credit card balances low in relation to overall credit availability and your ability to pay it off in full. The chart that we used to illustrate the power of compounding also applies to the size of your debt if you allow it to get out of hand.
- Avoid the temptation to make spontaneous purchases. Research and comparison-shopping help guard against impulsive purchases at the checkout counter. The internet has made comparison shopping much easier. Make sure you ask a lot of questions before making any big-ticket purchases. Conducting thorough research may delay your purchase and, as you really consider whether buying this product makes sense, you may even realize that you do not need it or are not as interested in spending your hard-earned money on it.
- Borrow prudently. Take out a loan only for purchases that will likely appreciate over time. Avoid borrowing for items such as clothes or furniture, which lose value before the first payment is made.
- Be a smart car shopper. Before you buy a car, consider issues such as its resale value and the total cost of ownership. Carefully consider whether buying a new car that depreciates the moment you drive it off the lot is the right financial move for you. You will often find that a car that is a year or two old with low miles and lots of warranty coverage remaining offers better value than buying a new car.
- Learn to enjoy reading. You won't be bored and feel compelled to shop, and you might just learn something in the process.
- Reward yourself with one modest purchase. Getting that first full-time job is cause for celebration. Treat yourself; just don't go overboard.
- Invest broadly. Beginning investors have a tendency to pick one stock—often a speculative one—and then get disillusioned with investing if the price falls. That one bad experience can color a person's view of investing for many years. Investing broadly spreads the risk of making a bad investment pick and increases your chances of a successful experience.
- Consider talking to a financial advisor or financial planner. Both of these professionals can help you put together a basic financial plan that can become your financial road map for the next several years.
If you take the example of the performance of a well-diversified portfolio over the past decade as illustrated in Chart 3, the total diversified portfolio of investments performed much better over the period than a portfolio made up of stocks alone. You can achieve a diversified portfolio by investing in a mix of stocks, bonds and assets such as Real Estate Investment Trusts (REITs) and commodities—known as real assets—through the use of exchange traded funds (ETFs), mutual funds and other pooled-investment products. If the list of mutual funds proves daunting, index-based ETFs can provide broad market exposure.
At this time of your life, it is often hard to determine what the future may look like. Starting out also can be a little daunting. These twelve tips may seem a little draconian when you are in the mood to celebrate your college achievements, but we think that they offer you a good road map and, years from now, you may find that they are one of the best graduation gifts anyone ever gave you.
* Chart 1 assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Small stocks in this example are represented by the fifth capitalization quintile of stocks on the NYSE for 1926-1981 and the performance of the Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio thereafter. Large stocks are represented by the Standard & Poor's 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general. Government bonds are represented by the 20-year U.S. government bond, Treasury bills by the 30-day U.S. Treasury bill, and inflation by the Consumer Price Index. Underlying data is from the Stocks, Bonds, Bills and Inflation® (SBBI®) Yearbook by Roger G. Ibbotson and Rex Sinquefield, updated annually.
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