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Strategies for New College Graduates to Build Wealth

New college graduates carry a much heavier student loan debt than their parents; their life milestones (a home, a wedding, retirement) cost much more; and, they often don’t have the same built-in savings cushions (COLAs, traditional pension plans).

  • College tuition has more than doubled since the 1980s.
    • Total student loan debt as of 2020 was $1.56 Trillion in the US, 3x more than in 2010.
    • Of the 44.7 million with student loan debts, 2.8 million students owe upwards of $100,000.
  • New college graduates buying their first home today will pay significantly more than their parents who bought their first home in the 1980s.
    • In May 2021, median home prices across the U.S. rose to a record $374,400, a steep 18.1% increase from a year ago. In Rhode Island as of June 2021, the median home price is even higher at $385,000, a rise of 19.4% year over year.
    • On average, current graduates will need to save approximately 6.5 years’ worth of their total annual pay to afford a down payment on a home.
  • The old adage was $1 million in savings was the retirement goal.
    • Even that may not be sufficient.
    • $1,000,000 in 40 years has the same spending power as around $302,000 today.

As a result, wealth accumulation should be a focus as early as possible to allow for the compounding “time value of money”.

How can new graduates build wealth? Here are a few easy steps…

  • Put Together a Financial Plan Understand your income and expenses. Identify your short-term and long-term goals to manage finances, so you can attain them. Knowledge is power!
  • Create and Follow a Realistic Budget – Only 50% of Americans under age 22 use a budget. Young adults on their own for the first time may cringe at the idea that they must limit their spending, but your budget can become a way to ensure that money is spent on the priorities that are defined in your Financial Plan. Following a budget helps build a healthy credit history, leads to stronger credit scores, aids with approval (and better interest rates) for car and home loans, and, ideally, translates into wealth accumulation over time. There are many free resources out there, including apps and online tools, to assist with creating a budget.
  • Start Saving for Retirement Now – Expenses, such as student loan payments or saving for a down payment on a house, can make it hard to prioritize saving for a retirement that is decades away. However, putting off saving for the future is one of the biggest mistakes you can make, because of the power of tax-free growth and compounding. Think of saving for retirement as paying yourself first. Take advantage of opportunities offered through your employer: many employers will match 401(k) contributions, which is essentially free money. Plus, if you have access to a Roth 401(k) plan, this can be an impactful investment over time. Regular 401(k) contributions are pre-tax, but are taxed at the ordinary income rate (whatever that rate may be) when distributions are made in the future. Your Roth 401(k) contributions are made after-tax, but earnings grow tax-free and retirement distributions can be taken out and used in retirement tax-free! This can be a crucial benefit in the future, including tax-diversifying your overall retirement savings.

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