A College Graduation Letter To My Daughter

Last year I wrote what I called a “practice” graduation letter to my daughter. Now that she has officially graduated, sans in-person commencement, I reviewed what I wrote and decided the advice is still pertinent. Here goes:

Grace, as a dancer, you have already learned since age 5 one of life’s most valuable lessons: how to address adversity, re-adjust, and get back at it. When this happens during your life, always remember your family loves you no matter what.

Now that I’ve dispensed with the mushy stuff, here is some financial advice that I’m sure you will cherish:

You will never be sorry you saved money

When you are older, I will tell you to live beneath your means. As you are just starting out, you have no means yet. So, I’ll tell you never to compare yourself with your peers -especially regarding worldly possessions. Trying to buy the hot designer dress, the newest car or the greatest house or apartment to match your friends is a competition that isn’t winnable. Saving money for your future self, however, is an endeavor that is highly achievable provided you start early and avoid mistakes along the way. Believe me, your future self will thank your past self for being so wise.

Create a budget

It mustn’t be detailed or complicated but compile your fixed expenses, like rent, food and savings, and compare it to your income. Whatever is left over is your disposable income. Yes, saving for the future is a fixed expense.

Save for your future

“You always need to look to the future because that’s where you’ll spend the rest of your life.” I stole that from George Burns – Google him.

Trust me, you will never be sorry having a cushion for an emergency, money for living expenses during a gap in employment or, best of all, so you can someday choose to work rather than have to work. And planning to save as part of your budget is a much more successful strategy than just saving what’s left over at the end of the month. Because, you guessed it, there’s never anything just left over. You’re good at math so check these numbers out:

• If you save just $200 per month and those dollars earn and compound at an average annual rate of 7%, you will have accumulated $524,962 by the time you are 62. When you’re able to save significantly more, those dollars will really compound.
• If you wait 10 years to begin saving you will have only accumulated $243,994.

Earlier = better.

Where to save

If you can participate in a workplace retirement plan, like a 401(k) or 403(b), save there. If not, we’ll open a Roth IRA and you can save and invest there. Don’t worry, I’ll help you.

Limit your debt

My grandfather told me when I was graduating college to never borrow money. In today’s world, that really isn’t possible or even advisable. Limit your debt, however, to items that will provide value to you over at least the term of the loan. For instance, a house or car loan is appropriate debt as long as it fits within your budget and still allows you to save. Incurring large credit card debt for meals out or vacations should be avoided because you end up paying the bill after the enjoyment is long over. Exception: Incurring credit card debt for a vacation is okay if you pay off the debt within 2 months.

It’s okay to use your credit card as long as you pay it off each month. That actually helps build a credit history while avoiding expensive interest charges.

Always read, read, read and learn, learn, learn. Your education to date is a solid foundation but just the start.

Love,

Dad, CFP®