How to Become a Millionaire: Jon’s 10-Minute Speech to New Grads

For the last two years, three very nice responsible engineering students have rented our townhouse. Last month, they all graduated, jobs in hand.

(Engineering’s good for that.)

As each of the young ladies moved out, Jon went to meet them to collect the keys, discuss any maintenance issues we should know about, and give them his standard advice for new grads:

Jon’s Speech to New Grads

Congratulations on graduating! And just when you thought you were done with lectures for a while, I’m going to give you another one.

“Here’s How to Become a Millionaire.”

Not get rich quick, but definitely become a millionaire.

When you start your new job, you may get the chance to enroll in your company’s 401(k) plan

Take it.

If you invest early, often and well, you will eventually be rich. And enrolling in the 401(k) plan is a great way to start especially when you’re in your early 20s.

A 401(k) plan is an employer-sponsored retirement account. Each paycheck, your employer will take part of your pay and put it into an investment account for your retirement. You’ll pick the investment, and I’ll talk a little bit about that later.

But the first step is to get started by signing up for that 401(k). 

 

How to Become a Millionaire: Jon's 10-Minute Speech to New Grads

You Can’t Beat the Return on an Employer Match

If your company offers a match, get the match. It’s free money.

Even if you’re paying off student loans, put enough of your money in the 401(k) to get the full match. 

No matter how good your investment skills, you’ll probably never beat the return you get by taking advantage of an employer match.

Here’s how it works. Say your employer will match up to 5 percent of your salary. So you invest 5% of your salary in your 401(k). Your company puts in the same amount of money. It goes into the same investments you’ve already chosen. When you leave the company, as long as you’ve stayed enough time, you leave with all the money:

The amount you’ve invested, the amount your company matched, and the amount the investment has grown. 

The match can vary, as can the vesting period. Some matches are more generous than others. But if you get a match, you should always invest enough to get the full match.

Your Investment Won’t Cost You As Much As You Might Think

Your investment dollar can work a lot higher than your spending dollar because it’s tax-deferred.

Unless you’re investing in a Roth 401(k), your 401(K) investments will come out of your paycheck before taxes. 

So if you have a 15% effective tax rate, you’re only giving up 85 cents worth of spendable cash for each dollar you invest in a 401(k). If your effective rate is 20%, you only give up 80 spendable cents per dollar, etc.

You won’t pay taxes on that money until you’re ready to pull it out in retirement, and then you’ll probably pay a lower rate. It’s another reason the employer plan is such a great way of building wealth.

Pick a Low Fee Fund

The 401(k) investments will charge you something to manage your money. Some investments charge more than others.

When you pick your investments, you’ll get lots of information about them. Look for the fees.

The best way to maximize your investments is to pick low-fee funds. Do that, and your money works harder. You keep more, and it grows faster.

Pick a big index fund, like an S&P 500 or total market index for most of your investment. As you get older, you may want to pick up some bond funds, but for now, just stick to mirroring the market and keeping your fees low.

Don’t Worry About Market Ups and Downs

As you invest, you’ll notice the market goes up and down, and so does the value of your investments.

Don’t worry about it. You’re young, and you’ve got 40 some years to invest. Don’t get scared, and don’t pull out of the market. 

Keep going. Steady investment wins every time, and here’s why:

When the market drops, and eventually it will, you have an opportunity to buy your investments cheaper. So when it goes back up, you hold more stock in, and you’ll be in better shape than you were before the dip.

When You Get A Raise, Put Some of It in Investments

After a bit, your employer may give you a raise.

Great! More money!

Take some of that raise and invest it, or use it to pay down your student loans faster.

It will never be easier to save money than now. Before you get used to spending more, use your raise to put you in a better position later. Pay down debt, pump up your savings, or invest it for your future before you worry about increasing your standard of living.

When You Leave Your Company, Don’t Cash Out Your Retirement

Eventually, you may move on to a new job at a new company.

When you do that, you may be tempted to cash out your 401(k).

Don’t do it. Not only will the IRS take a big bite of your investment if you cash it early, but you’ll also be derailing your retirement.

You’ll have some choices, and you can decide what to do.

You may be able to leave it with your old company if you like their fees and investment choices

You may be able to bring it with you to your new company’s plan if you like their fees and investment choices better.

Or you may roll it into an IRA, and have more choices of what you do with it.

The main thing is, roll it directly into your choice of retirement plans. Don’t take it out, don’t cash it in. Let it grow until you’re ready to retire.

The Lecture Ends

So that’s it. If you want to become a millionaire, start investing. Let your money work for you as hard as you work for your money.

For a simple example of the power of compounding and investing, for $100 a week, $5200 a year, investing over 45 years at a reasonable 6% market rate, your investment return is $1,106,266.30. So invest often, invest well, and you’ll retire a millionaire…or better.

What’s your standard advice to new grads? What do you wish someone had told you when you were first venturing out into the work world?

Disclaimer: We aren’t financial planners, and some students have special situations. Market returns are not guaranteed.  If you have a special financial situation, please consult with a financial planner or advisor to get more advice on your best path.

If your employer doesn’t offer a retirement plan, or you are self-employed, we have a post for that.

*Part of Financially Savvy Saturdays on brokeGIRLrich.*

32 thoughts on “How to Become a Millionaire: Jon’s 10-Minute Speech to New Grads

  1. This is awesome! I wish someone had given me this speech when I graduated, but luckily I had a few folks point me in the right direction pretty early on 🙂 Thank you for sharing!

    • Always good to have someone point you in the right direction, but kudos to you for listening. I think we often have more information in our 20s than we realize, but it takes some of us a while to catch on that it is actually important info.

    • Yep. I know your kids have a leg up on most, but it seems such an important lesson, and I’m not sure our renters had gotten it before.

    • Yep, rushing into debt is a big one, especially since so many new grads already have a big chunk through their school loans. Now some grads will need a dependable car, since a lot of kids can do without them at college, but it doesn’t have to be a NEW car, or even a particularly nice one. If new grads can keep living like students for a while (beater car, limited spending, roommates) they can pump up their retirement savings/pay down student loans pretty quickly.

    • That part was my contribution. I saw so many people do that when they left the bookstore I worked for, and several of them also talked about having done that at previous employers.

  2. “No matter how good your investment skills, you’ll probably never beat the return you get by taking advantage of an employer match.” I really, really think this is one of the biggest concerns that keeps people from contributing to their 401k. But, like you say, it doesn’t matter if you don’t know how to invest – stick with those low cost funds and you’ll likely be just fine!
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    • I think the reluctance to enroll is twofold…they don’t trust their investment knowledge and they fear the market crashing again. Which it will…eventually…and it’s actually a great opportunity for a young investor, particularly if they haven’t gotten too clever for their own good with speculative stocks. Their original investments will recover, and meanwhile, they’ve added a bunch of discounted stock!

  3. Thanks for the very good advice, Jon. Unfortunately it is too late for me. I am already retired and regret not doing all of the things you suggest. I hope the grads somehow get to read this, It is a good, solid way to start saving so when they get my age (71), they can live a life of ease.

    • Yep, at 22, those kids have 45 years or so of investment horizon before a standard retirement. That’s a lot of time for compounding to work!

    • They should be in a very good place. They are all very money conscious, and they all got good engineering jobs. Hopefully, they’ll be able to put that advice to use.

  4. Awesome post and spot on. My investing advice is always very very similar. The only thing that I add is to keep living like a broke college student. Have roommates, drive a beat up car and keeping meeting friends for $5 pitches of beer instead of $18 martinis.

    • Yes. Living below your income is much easier when your income jumps, as it does for many new grads if you can just hold off on lifestyle inflation. Sure, there will be some new expenses (loan payments, benefits) but they should be less than the increase in income.

    • Me, too, Jason. I’m glad I eventually got with the program, but starting at 22 instead of 28 would have helped a lot!

    • That is good advice. Making sure that you save more when you make more (before you get used to spending more) is not only easier, but it adds up quickly.

    • Thanks, Jamie. That’s great that your oldest managed to save. Are you going to help him set up an IRA with it? Since it’s earned income, he can.

    • Watching the markets move can be really hard on your nerves when you’re investing, Vickie. For most of us, committing to a timeline and learning not to pay too much attention during the short term is probably the best policy. I try to only look at my investments when I get the monthly statement, and we only track net worth quarterly. It helped.

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