Financial Decisions for Life After College

[formerly, Making Cent$ of Money - first started 2007-03-26]

Organized and presented by Professors Al Hibbard and Mark Mills

Key Concept for this session: Net Worth

If you will be graduating from college soon, getting a job, and entering the "real world", then there are some things you may wish to know about money. This seminar will discuss such issues as: health insurance and payroll; loans and mortgages; use of credit cards; and savings and investment. You will get some hands-on experience using various resources on the internet to help you better understand these issues. One site to visit that covers financial literacy is at aicpa-cima.com. Another site that provides a large suite of financial calculators (as well as others) is https://www.calculator.net.

Concepts

Health Insurance and Paycheck Issues

Health insurance and health spending (learn the vocabulary)

Paycheck deductions

Checking/adjusting withholding (example)

Summary

Make your healthcare insurance decisions based on your personal health needs. If you are generally healthy and have a High Deductible Health Plan available, consider this cheaper option and be sure to also implement a Health Savings Account (HSA). Otherwise, consider the regular health plan that is available. Before you become a consumer of health care, review some of the terminology involved since the plans are not always intuitive. Regarding paycheck deductions, when you get your first check and payroll "stub" (now digital) that spells out the details, review each item so that you understand what is being taken out and for what reason. Be sure that you have some taken out for your 401(k)/403(b) contributions. Increase this contribution each year with your salary increase.

Loans and mortgages

Circumstances for borrowing (a nice overview)

Interest rates and terms of loans

Loan payments

Additional expenses related to purchasing a home

Renting versus owning

Summary

As much as possible, try to borrow only for large items that increase in value over time (e.g., home, education, business) and not for items that decrease in value (e.g., car, boat). When you borrow money, the longer you borrow it and the higher the interest rate, the more you will spend on interest to cover your purchase (and this amount can sometimes become more than the original item). Thus, the maxim that while borrowing, time is not your friend. Buying a home is not always the "smart" choice; it depends on how long you plan to be there. Renting allows you to be flexibile for when you will be at a location for a short or unknown duration. Try to prepay loans whenever possible (generally, but not at the expense of not having an adequate emergency fund).

Credit Cards

Summary

Credit cards can be great if you use them correctly, or they can be a yoke around your neck if not. ONLY use a credit card if you have the cash (in hand - not enough to be coming next week). Avoid any credit card that requires an annual fee; there are plenty that do not. ALWAYS pay them off in full each month. Optionally, choose cards that give cash back for purchases (such as the basic citi bank card that gives 2% on every purchase).

Life Insurance

Summary

Always view life insurance as a safety net in case there is a death. In other words, only insure yourself or someone else if the loss of you or the other will financially impact your family either by income reduction or by now needing to hire more caregivers. Do NOT think of insurance as an investment (and so almost never buy whole life or similar variations); think of it as a pot of money to help those who are left behind and so (almost always) buy term life insurance. You do not need to insure your children. Once your children are on their own, if your own assets are sufficient, you may consider dropping or reducing your term life insurance.

Savings and investment

To get started, let's begin with an example to illustrate a few ideas.

WHAT? Looking ahead to future goals and planning for them

WHY?

WHERE? Vehicles that can be used

type time horizon risk tolerance range of return (average)
Bank short (0-5 yrs) Conservative 0.1% -- 3.8% (0.37%)
CD short (0-5 yrs) Conservative 0.2% -- 5.5% (1.5%)
Money Market short (0-5 yrs) Conservative 1.5% -- 6% (0.4%)
Bond short (0-5 yrs) or mid-range (5-15 yrs) Moderately Conservative to Moderate -2% -- 8% (3%)
Stock mid-range (5-15 yrs) or long-term (10-40 yrs) Moderate, Moderately Aggressive, or Aggressive -15% -- 30% (6%)
real estate mid-range (5-15 yrs) or long-term (10-40 yrs) Moderate, Moderately Aggressive, or Aggressive -30% -- 30% (2%, but depends on location)
business mid-range (5-15 yrs) or long-term (10-40 yrs) Moderate, Moderately Aggressive, or Aggressive varies

WHEN? Factors: - (examples)

HOW?

Other considerations:

Summary

In contrast to what we said in the Loans section, when saving or investing, time is your friend. This is because over time the power of compounding works in your favor. (Roughly, if your return rate is r%, the your savings or investment will double in about 72/r years.) For saving and investing, it is very important to pay attention to how soon you anticipate spending the money (i.e., the time horizon). If you need it in less than 5 years, it is important to be in stable locations such as a bank, CD, or money market (or possibly short-term bonds); only if you don't think you need the money for 5 or more years should you invest in stocks. When you invest in stocks (sometimes called equities), generally do not buy individual stocks but rather an index mutual fund or ETF that covers a broad collection of stocks (to diversify) such as the S&P 500 or Total Stock Market. A good and easy way to get started is to have contributions automatically come out of your paycheck and/or your checking account. (See Dollar Cost Averaging link above.) Finally, the last important consideration is where (not which brokerage house but which type of accounts) you invest your money. There are essentially three choices: (a) Pre-tax (such as 401(k)/403(b) or traditional IRA) where the money goes into the account before the salary is taxed by the state and federal government (but you WILL pay the taxes eventually on the principal and all the growth); (b) Post-tax (such as a Roth 401(k)/403(b) or Roth IRA) where the money goes into the account after the state and federal taxes have already been paid, but it comes out tax-free, both the principal (any time) and the growth (after age 59.5); (c) Taxable brokerage account (sometimes called nonqualified account since it does not qualify for any tax breaks) where the money goes in after taxes have been paid and taxes are paid when it comes out (though it, or least a portion of it, at a lower tax rate) and yearly as earnings accrue. Which of the three is best? A balance of all three gives you the most flexibility since the first two can only have withdrawals (generally) after age 59 1/2 without significant penalty and taxes (on the pre-tax). Aim to build a three-legged stool employing all three types of accounts.

Conclusions

General resources that may be helpful

New Employee Savings Tips
A pdf that you can download from the Employee Benefits Security Administration that echoes some of the things that we talked about above. It has good, simple information for new employees.
5 Financial Steps for New College Grads in Their First Jobs
From the NerdWallet site that talks about some of the basics that we discuss above.
Free Financial Literacy Resources for College Students
I have not reviewed these, but they appear to cover many important basics.
Mastering Your Finances: A Guide for New College Graduates
This starts by talking about budgeting and then continues with other important basics. I didn't see any conflicts of interest in this content, but it does come from an advisory service that wants your business and there may be other alternatives to consider as well.
The New Graduate's Guide to the Best E-Book Resources for Money Management
From the site called CollegeMoneyTips.com, there are other tips on this site. For this list of books, I would suggest skipping the Suze Orman book, and focusing on either (or both) of the J.L. Collins or the Dominguez/Robin books (both of which I have read).
Squared Away Blog
From the Center for Retirement Research at Boston College, this is a collection of blogs that may be useful to look at 5 years after you graduate.
Retirement Calculator
From FINRA, this is a goldilocks-like calculator (not too easy, not too hard) for seeing how you are progressing towards saving for retirement. This may be a good tool to consider 10 years after you graduate.

Action Steps for various stages in life

  1. Getting a job
  2. Emergency Fund
  3. Housing arrangements
  4. Student loans
  5. Credit/Debit cards
  6. Learning about finances
  7. Long-term savings
  8. Retirement savings

Last updated: 2025-04-01