Image Credits: JP Valery, Unsplash
Earning a college degree comes with great promise after many years of sacrifice and hard work, which is exactly the same discipline and forward thinking needed to become a millionaire. However, a great number of college graduates undermine that promise of prosperity that a college degree gives within days or weeks of graduation; don’t derail the prosperity opportunity by failing to follow these basic financial concepts in your life.
Follow the formula of 25-5-5, it works at any income level. No more than 25% of your income goes to housing regardless of whether it is a mortgage or just an apartment. If you are in an expensive area and you can’t afford an apartment in this range, then get a roommate. If that is still not enough to be within 25% to 30% of your income, rent just a room until you can afford it. Controlling your housing cost is the most important factor in having enough money to fund the other areas discussed here and still have some money to enjoy life.
5% should go to an emergency fund. Having money in the bank gives you the tools to overcome life’s challenges with more options and not be reactive. No longer will you be forced to rent an inferior apartment because you can’t come up with the security deposit required, or need to take out a loan to replace tires on your car.
Five percent to a retirement account. Start that long-term saving now, time is of the essence! Invested in a balanced mutual fund, the average investor will double their money every seven years. Take the age you want to retire and subtract your age today, and that is how many years you have to grow your retirement fund. Now divide that by seven. If at age 21 you have $10,000 saved, and assuming you will retire at 67, you have 6.57 doublings before retirement = $1,004,800. By waiting just 10 years to get your first $10,000 banked, it shortens your doubling years to just five, or $320,000. Saving early makes hundreds of thousands of dollars difference in how comfortable you will be in retirement.
Let’s talk about cars. Buying a brand-new car upon graduation is another single most bad decision you can make to guarantee a life in debt and financial struggles. Adding $40,000 more in auto debt on top of $50,000 in student loan debt just creates a deeper hole to climb out. Like housing, paying off past purchases with future dollars only steals money from the cashflow you need for your long-term financial plan. So, pay cash for your cars and other stuff too. If you start saving $400 per month to buy the next car, you will have $4,800 in just one year or $9,600 in two years. The longer you delay, the nicer car you can buy. Then keep saving that same $400 a month for the next car and you will likely find that each time you dip into that car savings fund you will be able to buy an even nicer car every time. I didn’t own my first “new” car until I was in my mid 50’s, as a treat to myself after I paid off my house.
Student debt must be retired as quickly as possible. You don’t want to have student loan payments stealing cash from your budget later in life while raising a family or trying to buy your first home. So, form a plan and get it done! If you put $10,000 a year against $50,000 of student loan debt, it will be retired in five short years. Keep saving that $10,000 a year for five more years and you will have $50,000 for a downpayment on a house. Bonuses from work in your early years should NOT be a vacation or to do something indulgent, rather consider it a gift to lift you out of debt even faster so you can use additional bonuses for the fun things for years and years to come.
If you are reading this and have already made some of those poor decisions, it’s never too late to change direction and seek the promise of a good life that a college degree affords you by having a good plan. If you found this article helpful, cut it out and put it with your diploma to remind you to be disciplined with money, and then when you become a millionaire pay it forward by making a donation to the WCU Foundation to help the next student.
Mark S. West Chester University alumni Class of ‘84.