Advice to All You Graduates

by Damon Darlin

This is the season for giving advice to graduates as they enter the workplace. Instead of listening to yet another recitation of the usual admonishments to "change the world," "carpe diem," or "wear sunscreen," those graduates — unless they are already trapped on the nonpaying internship hamster wheel — need to hear how to manage their paychecks.

College graduates may thank mom and dad, top left, for helping with tuition, but they still need advice on how to handle a paycheck. Small steps — packing your own lunch, for example — can make a big difference over the first 10 years of a working life.

Parents may have tried this. And many will undoubtedly send this article to their children. But, dear graduate, before you wad this up and toss it next to the keg still sitting there from last week's party, consider this: If you think it is tough living on very little now, imagine what it will be like when you are old and sick. Surveys say most of you already suspect Social Security will not be around after mom and dad deplete it sometime during your peak earning years. A recent survey by the Pew Research Center found that 61 percent of Americans 18 to 29 years old favored a system of privatized retirement savings accounts.

Let's start with the easy stuff first.

Make your own coffee You probably know you spend a lot at Starbucks, a company that collected $6.4 billion from coffee drinkers last year. You probably don't have any idea how much of that total came from you. A calculator at www.hughchou.org/calc/coffee.cgi let's you figure that out and also forecast how much you will spend over a decade of coffee breaks. (This Web site contains a treasure trove of financial planning calculators.) Say you spend just $3.50 every workday for your latte. If you drank the free office brew instead, you'd have more than $11,500 to play with after 10 years.

Does coffee shop coffee taste better than the free stuff? Probably, but ask yourself, do you want to live in a roach-infested studio apartment with two roommates your entire life? By the same logic, if you smoke, now is a good time to quit. Doing so will save you on average $25,600 over 10 years. Learn to cook Unless you have learned the art of sneaking into conferences at hotels to snag a breakfast croissant or cocktail-hour shrimp, you need to reduce your dining budget. A twice-a-week kung pao chicken takeout habit can easily drain you of about $10,000 over 10 years.

At the very least, learn how to pack a lunch. Taking your lunch to work may seem like the equivalent of sitting with the nerds in the school cafeteria, and going out to lunch with colleagues can sometimes be a smart career move. But bringing your lunch lets you be more choosy about who you are eating with and saves money. How much? Back to the online calculators (www.hughchou.org/calc/lunch.cgi) and you'll discover that the savings could be as much as $23,000 in 10 years. The tally so far: $34,500 (for the nonsmokers), or enough to make a down payment on a $172,500 house. That won't get you much in most big cities, so you really need to exert yourself.

Pay yourself first If you do everything suggested so far, you haven't had to sacrifice much except perhaps a regular lunch with the office jokers. Now, prepare to sacrifice. Set aside 10 percent of your paycheck in a savings or brokerage account separate from where the rest of your money goes. You'll be less tempted to spend it if it is hidden away there, unattached to a checkbook or an A.T.M. card. If your employer has direct deposit of paychecks, your paycheck can probably be directed to different places.

Here comes the tough part. You are going to squirrel away this money in addition to the pretax money that you take out of your paycheck to save in the company 401(k). Only 31 percent of workers 18 to 25 participate in a tax-deferred 401(k) retirement plan, according to a recent survey by Hewitt Associates, an employee benefits consulting firm. The others undoubtedly assume that they'll get to it later. About two-thirds of workers 42 to 59 have money set aside in a 401(k).
There is an important reason you want to start early, even though it hurts. Say you withhold $375 a month for your 401(k). In 40 years, you'll have $750,000. But those who waited a decade to get started would have only $377,000.

And guess who delayed? Mom and dad. The average amount in a 401(k) is less than $60,000, according to the Investment Company Institute, a trade association of retirement fund companies. Generation X isn't in any better shape. A study by the Center for Retirement Research at Boston College found that 49 percent of those born from 1965 to 1972 won't have enough money at retirement to maintain their standard of living.

Another bit of advice: Stick the money in the broadest stock index fund offered by your plan, not bonds and not a money market fund. Sure, the markets may stumble at some point during the next 45 years, but history has shown that they will rise over a period that long. You take risks when you are young.

Ignore your raises Every time you get a raise, and you'll get them because you are working hard instead of spending money you don't have, pretend you didn't get one. Bank the entire amount.
Over time, you'll start spending the money. It's human nature. But you'll start spending it more slowly. You'll keep the car another few years. You won't immediately move to a new apartment. All that helps money to accumulate.

By this point, you may be screaming: "I can't afford to do this. There will be nothing left for me to live on. Have you seen my student loans?"

A few words about those loans. The government will make its annual adjustment of interest rates on existing student loans on July 1 to reflect recent increases in all interest rates. Consolidating your loans at a fixed rate to lock in a lower interest rate is one possibility, but you need to calculate if the longer time frame of such loans — and the greater overall interest payments — offset the savings from the lower interest rate. (You can't consolidate consumer loans or credit card debt with the student loans.) You can always pay a loan off early once your salary increases.

Now, back to the hectoring. Having less to spend can help you spend less on frivolous things and save for worthwhile causes. Having less will also make you work harder to get more. If you are comfortable, you get complacent.

Don't borrow to buy depreciating assets Almost every consumer product from an iPod to a sofa is worth less the moment you buy it. You are just paying extra for it with a loan. Borrowing, by the way, means taking out a loan, buying it on installment or using your credit card when you don't have the money to pay off the balance. If you can't afford it, don't buy it.

An exception is a car, which may be a necessity that would be out of reach otherwise. One option to consider is a used car coming off a dealer's lease. They tend to be driven carefully and there are a lot of them thanks to recent incentives from manufacturers. Keep the term of the loan short to minimize cost. The latest edition of the Consumer Reports "Buying Guide" lists the most reliable used models, including the best ones for less than $6,000 like the 2002 Saturn SL sedan and the 2000 Toyota Echo. The guide also includes the less reliable models like the 2002 and 2003 Mini Cooper and the Volkswagen Beetle from 1998 through 2004.

Protect your credit Eventually you will have to borrow money for a car or a home. If you want to pay as little as possible in interest, you want pristine credit. So make yourself a credit card company's worst customer: pay your bills on time and never carry a balance. No exceptions. To help avoid temptation, use no more than two credit cards. Try to find one that gives you rewards — airline ticket rewards or cash — for using it, but still won't charge a fee for that privilege.

Another technique to cut down on incidental expenses is to train yourself to use the A.T.M. only once a month. Take out enough cash to get you through the month, and when you run out of cash near the end of the month, stop spending. Don't grab for the credit card.

Now go out and seize the day. And wear sunscreen