Often we are asked to work with a promising undergraduate on a project allowing them to receive Honors credit for a course they take in our department. A common course where this occurs is our Introductory Personal and Family Finance course. Ms. Paige Wheeler wrote her paper on the ten most important financial tips for a new college graduate, after reading The Only Guide You’ll Ever Need for the Right Financial Plan, by Larry Swedroe. This financial tip will enumerate her highlights for her peers and, hopefully, you.
1. Stay within your means. While it is normal to graduate with debt, proper debt management is crucial. Don’t get over extended. Shop for the best rates from quality companies. Pay off your loans as quickly as possible.
2. Appropriate insurance is vital to financial success. People buy insurance to protect their property, their income, and their wealth by transferring risks they do not want to keep to an insurance company. Shopping for insurance is the same as shopping around for loans – you need to search for the best rates from high quality companies
3. Having a well prepared and detailed investment plan is a necessary condition for financial success. A good investment plan helps eliminate fear and emotion when making investment decisions, as you will be more disciplined. You cannot predict the market but you can stick to your plan, including paying yourself first, dollar cost averaging, and diversification.
4. Understand the difference between risk and uncertainty. In finance, risk is calculated using historical data but the returns on your investments depend on the uncertain returns of the future. This uncertainty demands a diversified portfolio.
5. Related to the above, financial success requires one to make financial decisions with your head and not your stomach, as “stomachs rarely make good decisions”. Yes, one can spend a lot of time doing research and making calculations, but making informed choices is key for success. Gut feelings are not a good basis for decision making. Use the information available to make an educated decision and decide which risks are worth taking and which aren’t.
6. You have to be smart about which risks you do take. Importantly, never invest more than you can afford to lose. Sure, if you are worth 1 billion dollars, risking 1 million dollars with the hopes of making 2 million may not be that big of a deal. If you are worth 1 million dollars, however, and are consider risking all of it with the hopes of it doubling, it is a huge deal. If you are wrong, you are financially devastated.
7. A well-diversified investment portfolio is paramount to financial success. It must have appropriate asset allocations to fit your risk tolerance and time horizon. As a young person, you should try to can take on more investment risk, but do so in a highly diversified set of equities. In addition to equity investments, it is important to have proper asset allocations among stocks, real estate, bonds, etc. A related point is the need to periodically rebalance the portfolio to make sure it reflects your investment plan.
8. It bears repeating that a younger investor should be more heavily weighted in equities. Equities (common stocks and stock mutual funds) are one of the few asset classes that consistently keep pace with inflation over the long run. Inflation diminishes purchasing power but equities will help preserve wealth, in spite of inflation.
9. Find the right investment management strategy, either active or passive. Having actively managed funds means you try to stay ahead of the market with the hopes of performing above expectations. On the other hand, passively managed funds, only require the investor to invest across each asset class and to rebalance. Many are the advocates for passive investing, as you can earn market rates of return with low expenses and high tax efficiency.
10. The final tip for a new college graduate is a key to long-run success. Begin saving for your retirement. Take advantage of the opportunities employers provide to enable you to lead a comfortable retirement life. If your employer has a 401(k) program in which they match funds, make sure you set aside at least enough to get the full employer match. Be sure to maintain a well diversified investment plan. Understand the pros and cons of a Traditional IRA versus a Roth IRA. (More information on IRAs is contained in an earlier Financial Tip (click here).)
Having a solid financial plan and sticking to it is crucial for financial success. To assure the desired result; plan ahead, spend wisely, and understand your insurance and investment portfolio. Stay on top of your financial life, so as to not be crushed by your financial mistakes. Along the way, never forget that the right decision depends on your definition of financial success - as it will set your path toward your financial success. It will likely differ from your friends’.
Paige Wheeler, Undergraduate student, MU School of Journalism
Robert O. Weagley, Ph.D. CFP®
