Personal Finance from New College Grad’s Perspective

Last weekend we had a mild snow storm (6-8inch of snow), and as it is customary, I had to go and shovel my car out. Next to me was a young gentleman who was doing the same. He had just moved in our apartment complex, in same floor as ours, from Florida and this was his first ever snow storm. He had BMW 3 series which he is trying to sell. He seemed to be enjoying it (I was not!). I finished my car in less than 15 minutes and he mentioned it’s been 30 minutes and he is still working on it. Anyways, I just asked him one question, why are you selling the car? And that was it! Two weeks, two football games, and perhaps two twelve packs later, I realized we had discussed everything that affects personal finance and investing for a new college grad. While he was under water (student loans, car loans), I was impressed by his sincere efforts to put his house in order. Since I never went through the student debt phase, I had no idea what it means to be under student loan debt. For me, this discussion was a great learning experience.

Although this discussion was not directly related to dividend investing, but think it followed the essence of dividends investing (i.e. strong foundation and small building blocks). I thought it would be worth presenting the high level framework that came out of that discussion. So following is the summary of what should be focus after graduation.

Assess state-of-finance: The new grads should start with assessing their finance with reference to incoming cash flow and outgoing cash flow. Once these two factors are mapped out then it is time to figure out how to optimize both sides (i.e. maximize incoming, and minimize outgoing). For the first two years after graduation, debt elimination or reduction should be the primary goal.

Emergency funding: This should be the first step. Instead of investing, create an emergency funding for self. Depending on your expenses and comfort factor, create a cash buffer of $2500 to $5000. Keep it invested in high yield money market accounts. It can be done over a period of 5 to 6 months. The faster you accumulate, the faster you will have additional cash at your disposal.

Student loan debt reduction: This is perhaps the first big ticket item that new grads need to worry about. Identify a solution for this. It is a small amount and may not seem obvious, but it is drain on outgoing cash flow. Since it remains for a long time it just takes forever. My personal opinion is, if possible, discuss with your friend and family member (with whom you can), and borrow small amounts to immediately reduce your principal amount. Over a long term, it has a significant impact. This not only reduces your monthly payments, but also the overall interest that one would pay over a period of time. In fact this applies to any other loans. Avoiding additional loans for first two years after college will go a long way in building a strong financial foundation.

Share apartment: Hey what’s wrong with this one? Didn’t you do in college for four years? why not for additional one year. This helps in reducing outgoing cash flow.

Part time money making activities: This is where I believe most college grads miss the bus. Being out of college and money in their pocket makes them loose focus. I believe if college grads can spend some extra time in part time jobs they can increase their incoming cash flow. They continued to do in college, why not one extra year. This in turn can be used for debt reduction.

I believe for the first two years after graduation, new college grads should focus on debt reduction (instead of investing). Investing can be done under the umbrella of retirements accounts. When the debt level has been reduced by 75-80% then one should start thinking about investing. Having a continued debt will always remain a week link in one’s foundation.

These few things may seem trivial, but two or three years down the line, it can help lay a strong foundation. I believe it is very important to have a strong foundation and then use small building blocks to construct your majestic empire state building.

2 Responses to “Personal Finance from New College Grad’s Perspective”

  1. Dividend Tree says:

    Tom: That’s what I was attempting to highlight. Student debt’s are drag for a long time. Your comment reiterates the theme of this post. Thanks for stopping by and leaving a related comment.

    Best Regards,

  2. Tom says:

    If only I had a financial plan when I graduated back in 1992!
    Swimming in debt, I struggled for years.
    It’s only the past 5 years that I’ve gotten back on track.

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