GUEST BLOG POST: To the Class of 2011: Financial First Things
June 02, 2011I’m waiting, but the invitation to give a college graduation speech hasn’t arrived yet. It’s really too bad, since I would be a great candidate. I’m acceptably old, just of an age to be respected by the 20-something set, but not so old as to be irrelevant or needing assistance to the podium. The fact that I’m a woman should appeal to the majority of college graduates. Giving sage advice is what I do all the time as a financial advisor. Plus my speech is already written.
Looking out over that sea of young, expectant faces, and trying mightily not to be distracted by the purple hair, tattoos, or nose rings, I’d begin by invoking the wisdom of the timeless phrase, “First things first.” I’d remind these graduates that their entire education, from babyhood through college, has been focused on the importance of doing things in the right order. Socks before shoes, first base before second, learner’s permit before license, 101 courses before senior seminars.
They’ll need to hang on to this precept as tightly as they do their diplomas, because the world they are entering is anything but orderly. It’s now acceptable, even normal, to live one’s life out of sequence. For example, once upon a time you got a real job first, then got married, then had children and bought a house. Today such a sequence is considered quaint and unnecessary, like landlines and good penmanship.
Our increasing longevity is partly responsible. Ask any centenarian: the eBay value of the President’s congratulatory letter on your 100th birthday is dropping rapidly. This longevity means these young men and women are likely to get a lot of “do-overs” in their lives. Putting the proverbial cart before the horse will not necessarily spell a disaster as they travel through life.
But it may be expensive. Generally speaking, our finances are governed by an inherent cycle of wealth creation and depletion over our lives. When we sidestep this rhythm, we do so at our own financial peril. It’s one thing for a 50 year old to behave like a teenager when in comes to love or taste for fast cars, but quite another when the two have the same net worth.
So to the Class of 2011, I’d offer some “Rules of Order” to keep them in financial sync:
1. Save before you invest and put today’s needs before tomorrow’s wants. You will no doubt hear that because you are young with a long planning horizon, you can take a lot of risks with your money. You may be tempted to take some money from your paycheck or from graduation gifts and take a shot in the stock market. However, your time horizon is quite short when it comes to equipping yourself for the demands of adult life. Right off the bat, you’ll need a car, place to live, and a plan to reduce whatever credit card or student loan debt you’ve accumulated while in school. You’ll need a reserve fund to support you if you lose your job, or have to relocate for a new one. And you’ll need health insurance and disability insurance so you are covered medically and financially in the event you get sick, or become disabled—something that could happen to any of us at anytime. In short, you need cash in the bank, insurance, food, shelter and transportation before you need shares of Apple or Google.
2. Borrow ahead of asset appreciation, rather than behind. In other words, be smart about debt. The best reason to borrow money is to finance an “asset” that appreciates over time, as opposed to losing value or depreciating. Your student loans are an example of good debt: your education is a human capital asset that should pay off in increased earnings in the future. A house qualifies too, the recent real estate market notwithstanding. We all know cars are depreciating assets, so borrowing to buy one only makes sense if the car is necessary for your employment or building a career.
3. Seek financial advice from a financial planner before a financial crisis, rather than waiting until after. Notice I am using the term “financial planner, not “stock broker.” A true financial planner will help you develop a solid financial plan for all aspects of your financial life so that you can achieve your short, medium and long term financial goals. (For info on how to find a good financial planner, check out this article from Financial Finesse.)
At this point, I’d close my commencement speech. Then I’d wait for these eager and attentive young men and women to register their appreciation for my wisdom in the customary manner — namely, by launching some brightly colored beach balls and holding an impromptu volley ball game in the college auditorium.