For those wearing caps and gowns …

Posted by on May 11, 2011 @ 9:15 am in Personal finance

My brother-in-law will be graduating from college in a few days, and that has me thinking back to when I started my career a few years ago.

As I set out on my own, I had many questions about finances: How much should I spend on rent? Should I have a roommate? What car should I buy, and how I will afford to keep gas in the tank? (And, of course, how many pairs of shoes can I afford?)

If you’re among those entering this new and exciting time in life, I’m sure you’re already receiving a ton of advice. Surprisingly, the best financial guidance I received—advice I shared with my brother-in-law, and which I’ll share with you—is to keep retirement in focus.

This may seem odd. After all, you’re just starting your career, so why think about retirement? You’re likely worried about more immediate financial considerations, like how to pay down student loans, save for a home, or just pay the bills. Yet, as you start earning, the following pointers I received are worth noting:

  1. Start saving early. Every dollar you save now will make a difference later. The reason is the power of compound interest—the earlier you save, the more years your money has to take advantage of this principle. (Not a familiar concept? See just how powerful an early start can be.)
  2. Make it automatic. If you set it, it’s harder to forget it. If your employer offers a retirement plan such as a 401(k) or 403(b), enroll and start contributing. You may barely notice the difference in your monthly earnings. Also, if your employer offers to match your retirement contributions up to a certain percentage, don’t pass it up. (Would you ever ask your boss to reduce your salary? Missing out on a matching contribution isn’t much different.) You can also consider automatic purchase plans that regularly direct money from your bank account or paycheck into an investment account.
  3. Keep it simple. As you start this new phase in life, you already have plenty of decisions to make. If you’re not sure how to invest your money, consider the benefits of an “all-in-one” fund, such as a target-date fund. Funds like these can simplify investing while still providing a well-diversified portfolio. (Vanguard has just announced lower fund minimums on many funds, including our Target Retirement Funds, making it easier than ever for you to start saving now.)
  4. Find a balance. The key is to find the right balance between spending today and saving for tomorrow. You’ll work hard for your income, and you should enjoy it. But consider the “opportunity cost” of your purchases: living in luxury now could cost you later in life. For me, setting a budget was ultimately about tradeoffs—prioritizing what I cared about most and making frugal choices elsewhere. I chose to live by myself, but in a relatively inexpensive apartment. I bought a used car to avoid unnecessary debt and carpooled with peers to save on gas. I avoided big-ticket items like major electronics, but (having just moved to a new location) chose to spend more on going out with friends. And shoes. I continued to spend on shoes.

I wish you the best of luck as you begin this next stage of life.

Notes: Like all investments, mutual funds are subject to risks, including possible loss of principal. Diversification does not ensure a profit or protect against losses in a declining market. Investments in Target Retirement Funds are subject to the risks of their underlying funds. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the fund’s target date.

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