What Recent College Grads Need To Know About Money

What’s the most important thing about financial planning and investing? Arguably, it’s the power of compounding interest. Compounding interest helps investors greatly down the road if they invest their money wisely, and can really hurt if they exceed their budget and take on credit-card debt.

Two Financial Considerations For Recent College Grads

1. Living

The general rule of thumb for living expenses is to keep it under 30% of your annual salary (the general standard for housing affordability). One way to calculate a good monthly expense target is to take your after-tax salary and divide it by 40. If you make $40,000 a year after-tax, you’ll probably have to settle for roommates in places like San Francisco and New York City.

Higher taxes and rents also make it tougher to live in most of the attractive neighborhoods without having a really well-paying job. Some may opt to live further away from work to save money, but the adverse effects of a long commute time usually outweigh the benefits.

As a result, those living in some of the more expensive cities might have to compromise by spending less money on entertainment. This is a tough proposition – a large part of the reason people move to cities like New York and San Francisco is to enjoy what the city has to offer outside of the office.

2. Saving & Investing

Though it’s fine to stretch the budget a little bit to live in some of the more expensive cities, it is absolutely imperative that investors max-out their 401k contributions and take full advantage if their employer matches. An employer match is free money that can grow! Free money that can turn into a down payment on a house, college education, the vacation house most dream about!

But putting money toward a 401k is only half the battle. The other half is having the right investments. It’s well-documented how terrible actively-managed mutual funds with high fees can be in the long-term: their high fee structures create a significant chasm between returns and what investors keep; their trading costs often aren’t wrapped in; and the high turnover generates a hefty tax bill.

When searching for funds to invest in, look for low-cost index funds. The best options are usually Vanguard and Spartan ETFs, as they provide broad market exposure at a very low cost. For recent college grads, your investment time horizon is very long – somewhere between forty and fifty working years. Therefore, risk tolerance should be aggressive, meaning primarily equity-driven with some fixed-income exposure for diversification.

For more information about sponsored articles, email ads(at)benzinga(dot)com.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Find out more about Sponsored Posts.