Updated: Jul 9, 2020
Graduating from college is a pivotal moment in your financial life. Making the right financial decisions can set you up for a successful relationship with money.
Here are the five financial priorities for recent college graduates;
Find a job
Build an emergency fund
Clear all toxic debt
Make investing a lifelong habit
Pay off student loans
This post discusses each of these priorities in detail, explaining why they are ranked in the order that they are and how thinking in the long term can make your financial life easier for decades to come.
Try not to obsess about your student loans
When I graduated from graduate school, I had over $50,000 in student loan debt. I know from experience how stressful it can be to be carrying that level of debt at a young age. It feels like you have a mortgage payment but no house to live in.
Naturally, new graduates want to free themselves of this anxiety, which causes many people to make their student loans not only their number one financial priority but their only financial priority. This is the biggest mistake new graduates make; they only focus on one aspect of their financial life.
While it is good to pay off your student loans, focusing exclusively on that goal has an opportunity cost. Dedicating your limited financial resources to paying these loans off will prevent you from other financial priorities that can help you build more long-term wealth.
Priority 1: Find a job
Most people go to college to find a high paying job or find a job doing what they love. You have just invested several years and a lot of money in putting yourself in a position to accomplish that goal, so of course, it should be your number one priority.
The most valuable tool you will ever have to build wealth is your income. This is especially true when you graduate from college and have no assets or a pile of debt.
When is the best time to start sending out resumes and getting serious about landing your first job after college? At least six months before you graduate.
According to research from the University of Washington;
It takes an average of 3-6 months to find a job after graduation.
53% of recent college grads are either unemployed or working at a job they did not need a college degree for.
If you want to hit the ground running post-graduation, it's essential to start applying for jobs you want as soon as possible. If you've recently graduated from college, your number one priority must be to get your resume in front of as many employers as possible and start generating income as quickly as possible.
What if I graduate into a lousy job market?
I graduated with a degree in economics in 2010, right on the heels of the great financial crisis of 2009. The particular nature of that recession hit the financial industry very hard. Employers were not lining up to hire 21-year-olds with a bachelor's degree in economics.
I could not get my foot in the door at any job related to my degree for over a year. That did not mean I did not have a job. I stayed on at my job working maintenance at a country club that I worked during the summers. Not only that, but I also got a second job bussing tables at a local restaurant.
If you graduate into a crappy job market, you need to take any job you can find. Be grateful for that job, even if it's not the job you want right now. While you're working that job, make sure your resume and references are bullet-proof and start sending out as many applications as possible.
Here is something I wish someone told me while I was working minimum wage jobs after graduation; your current circumstances do not dictate your future reality. Just because things are difficult right now, does not mean that is how it will always be.
Economic cycles change, job markets improve, and so will the opportunities that are available to you.
Priority 2: Building an emergency fund
Yes, you need an emergency fund, and yes, you need one before you pay off your student loans.
I realize that there is nothing exciting about parking cash in a savings account, earning 1% interest. This is especially true if you have loads of debt that is causing you severe anxiety.
Think of your emergency fund as taking your "financial medicine." It might not taste great going down, but it could save you from a world of hurt.
If you don't have cash available in case of emergency, you leave yourself vulnerable to loading on more debt.
Let's say you graduated six months ago with $50,000 in student loan debt. Once you got your first job, you started throwing every penny you have against your student loans. You feel like you've started to make a dent in that $50,000, and you're feeling pretty good about things. Then, right before the probation period ends at your new job, you get laid off.
How are you going to find the money to pay your bills if you have no savings and just lost your job?
You are borrowing it.
You've spent the last six months paying off student debt, and now the debt piles back up. This time instead of student loan debt, you will be adding credit card debt. That can be a deflating feeling and even causes some people to lose hope.
The best way to "keep the debt off" is to build some savings as you pay off the debt. It will take you longer to clear the debt, but you will shield yourself from having to borrow more money to cover unexpected expenses.
If you have a healthy emergency fund set up, your chances of staying out of debt are much higher.
Priority 3: Paying off toxic debt
Not all debt is created equal. In a previous article, I ranked the seven types of debt from worst to best.
Here is a summary of the rankings
Mortgage (your home)
Mortgage (income property)
If you have payday loans or credit card debt, you should focus on paying those off before worrying about your student loans.
The average interest rate on credit card debt is 19.24%, while some of the highest interest rates on credit cards are pushing 30%. If you think about paying off debt as an investment decision, ask yourself where you can find an investment that pays you a guaranteed return of 19% to 30% per year.
The answer? Nowhere, because no such investment exists.
If you have non-student loan debt, you're going to have to look at how your student debt fits into your overall debt. There are two popular strategies to pay off debt.
The snowball method
The avalanche method
The snowball method is a strategy where you pay off loans with the lowest outstanding balance first. The avalanche method is a strategy where you pay off the loans with the highest interest rate first.
If you are looking for a comprehensive guide to everything you need to know about debt, read this story.
Priority 4: Make investing a lifelong habit
Once you have landed your first job, built up an emergency fund and paid off your toxic credit card debt, it's time to start investing and saving for retirement.
This is not a rule set in stone. Depending on how much student debt you have and the interest rate you pay on that debt, it may make sense to pay that debt before you start investing.
However, my personal preference is to begin saving and investing for retirement before you go all out on your student debt.
When you graduate from college, you have one variable working in your favor, and that is time. The more years you have to save for retirement, the less you will actually have to save.
If for example, you wanted to save $1 million by the age of 65:
If you start at age 25, you would need to invest $298 per month
If you start at age 35, you would need to invest $670 per month
The younger you start investing, the more you can let compound interest do the heavy lifting. Each year you delay investing for retirement, you will need to save more money over the course of your lifetime.
If you are lucky enough to have access to a 401k through work, you should contribute enough to get the full employer match. Failing to do this is giving away free money.
If you make $50,000 per year and your employer matches up to 5% of your salary, and you contribute $2,500 into your retirement account, your employer contributes an additional $2,500 into your account.
You just doubled your money by doing nothing.
By age 65, you would have $1.4 million, and you would have only needed to contribute $150,000 over the course of your life, assuming a 7% average return on investment.
The other $1.25 million would come from your employer matching contributions and investment gains.
Action item: Do not simply take my word for it. Play around with this retirement savings calculator. You can easily modify it to account for a 401k or employer-matched retirement plan. All you need to do is add in the monthly contributions that your employer makes on your behalf. It can help you figure out how much money you'll have in retirement if you start saving early.
Beyond the numbers, it's important for psychological reasons to build the habit of saving and investing as early as possible in life. Investing is an intimidating and scary for many people.
The sooner you face that fear and start investing, the more comfortable you become with the process. The older you are before you start investing, the more likely it becomes that you never start at all.
Priority 5: Attacking student debt
Once you have landed a job, have built a substantial emergency fund, have paid off your toxic debts like credit cards, and started investing some money for retirement, it's time to start aggressively paying off those student loans.
Only now you will be doing some from a position of financial strength, not desperation.
By the time you get your student loans paid off, you will have built up a significantly positive net worth rather than just getting back to a $0 net worth if you made repaying student loans your first and only financial objective after graduation.
Once the student loans are gone, start thinking about what you want to do with the money you paid against the principal. This is new money in your budget you can allocate to other important financial priorities like saving up for a house.
You can be successful with money
The period after graduating from college is an exciting time filled with endless possibilities. It is also a period of great uncertainty. That uncertainty can lead to stress, especially if you have a lot of debt to deal with.
Your number one priority should be finding a job and generating income. If you are forced to take a job that you don't like or does not pay much, try and be grateful for that job. Remember, even if you graduate into a tough job market, you will eventually find the job you want as long as you don't give up.
Once you have some money coming in, you need to build an emergency fund as quickly as possible.