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.
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).
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.
*Part of Financially Savvy Saturdays on brokeGIRLrich.*