These are strange financial times that we’re living in these days. And while that’s true no matter what stage of life you’re in, the economic and workforce dynamics are especially unique and bewildering for young people. So, with graduation season now upon us, it’s fair to wonder how they should approach money management once the caps hit the ground and the diplomas are framed.
The two overarching factors that most influence these decisions are the value of higher education and the availability of jobs. A college degree, in general, is undoubtedly worthwhile, but with student loan debt in this country recently surpassing the $1 trillion mark, students need to carefully weigh the costs and benefits of each school and area of study they’re considering through the prism of the job prospects offered by each. The job market is becoming increasingly friendly to recent grads, but the potential there is neither uniform nor necessarily feasible, especially in light of the fact that the average student now graduates with more than $27,000 in debt.
Roughly 53% of U.S. employers plan to hire recent college graduates in 2013, according to a CareerBuilder.com survey released last month. That’s about on par with last year (54%) and is significantly higher than the 46% and 44% of employers hiring from this demographic in 2011 and 2010, respectively. Twenty-seven percent of hiring managers also say they’ll offer young people higher starting salaries than in years past. The following breakdown illustrating the projected salary ranges for new hires out of college:
- $50k+: 25% of recent graduates
- $40k – $50k: 20 %
- $30 – $40k: 29%
- Less than $30k: 25%
So, to return to the original question, what is the best strategy for young people these days?
“What I tell the students that I talk with here at the University is three things are really important for you to have a healthy lifestyle in terms of finances,” Dr. Joyce Serido, an assistant research professor in the Take Charge America Institute at the University of Arizona, told CardHub during a recent interview. “The first thing – and this is something young people are typically understudied no matter whether they’re high school students or college students – is you need to understand how money works, how the money system works. And if you don’t understand it – and most of us don’t – you do some investigating. The reality is, even if you did take a class on financial literacy, the financial services system is changing very rapidly.”
That is sage advice indeed, given how the poor state of financial literacy in this country has affected the economy in recent years, making us, well, poorer in the process.
“The second thing I encourage them to think about is everything you do, every choice you make, has both risks and rewards or costs and benefits, and if you don’t understand that going into a decision, you could get hurt,” Serido added. “The third thing is you really have to know your own values. For some people, getting a college degree is worth whatever investment they have to make. For other people, it’s not quite the same benefit to them. Your value is what’s driving this whole thing because what’s a good decision for you might not be a good decision for me.”
In other words, young people need to go against the very nature of youth and plan strategically rather than put the pedal to the metal without a defined plan. We’ve already discussed how to evaluate the expected return on an investment in higher education, so we won’t go into that in more detail here. That’s far from the only investment new grads need to consider, after all.
No, I’m not talking about the stock market. Well, not exactly. It’s natural for members of the workforce to feel like they’ve got a ton of money and look for quick ways to make it grow. But simplicity, not algorithms and specific stock tips, is the name of that game.
“If you have a great job, at least for the time being, once you know what your bills are and you’ve got your little budget, there’s the formula which is pretty standard: you want to have in savings six months of expenses covered. That’s the first thing you want to invest in: how do I safeguard my future? And that doesn’t mean everything I get goes into that six-months’ savings, but that now becomes your savings goal,” Serido said, adding that “if you’re fortunate enough to work for a company that has a 401(k), then you want to sign up for that because if it is a contributory plan, then for every dollar you put up they put up another dollar. You want to max out that investment as soon as possible.”
Another thing that we at CardHub have covered in a fair amount of detail is the importance of credit building. Your credit standing impacts a lot of important stuff, including the terms you’re going to get on your mortgage, the insurance premiums you’ll pay, whether or not you can lease a car or rent an apartment, and the type of jobs you stand to get hired for. And, believe it or not, at least having a credit card is the most efficient way to build credit (assuming you pay your bill on-time each month and don’t overspend) because it will add information to your credit reports on a monthly basis. You can check out our picks for the Best Credit Cards for Graduates in 2013 for tips on how to select a card if you don’t already have one.
At the end of the day, the best thing young people can do with their money is keep it simple. Budget, save, and invest for long-term growth – it’s really as easy as that. But we still can’t end there because there are undoubtedly a few overachieving parents out there who are reading this article looking to get a jump on lesson planning for kids whose graduation days are still a few years away. Not to make everyone else feel bad, but those guys are really on to something with the early start.
According to Thomas Nist, the Donahue Chair in Investment Management Duquesne University’s Palumbo Donahue Graduate School of Business, saving is indeed the best investment that young people can make, but the best saving habits are actually groomed from an even younger age.
“Investing, broadly defined, includes saving. This is a good habit and behavior that should be introduced as soon as a child understands what money is (and is not),” he told CardHub. “Since it is a vehicle for spending, and children see that most clearly, it is easy for a child to develop a ‘spend’ relationship with money and never venture beyond that. So to separate income from outflows and point to the value of building a reserve for a big purchase, long term goals and a safety net is a lesson that is more valuable than any money gift. The adults teaching this lesson should point to specific goals and rewards that come with this good habit.”
If nothing else, that’s certainly music to the ears of everyone planning to buy graduation presents this year. “I would give you a check, but let me tell you about the importance of saving instead!”