In this article I’m sharing the 6 money rules for graduates, I wish someone sat me down and told me. I might not have listened, but knowing the possibilities is the first step to achieving your goals.
If you take nothing else away from this article, there’s no better time than right now to make sure you set in motion, positive steps for your financial future.
It’s graduation season and my LinkedIn feed is filled with recent graduates looking for their first job after university. It’s an exciting time, to enter the job market and make your first grown-up salary, but there’s probably never been a more uncertain time financially either.
Now I graduated over 20 years ago and in that time I’ve learned a thing or two. I’ve also made many mistakes along the way. If I knew what I know now, would things have turned out differently? It’s not that I have a single regret in my own journey. I was always destined to start a business, though, at age 20, thoughts of retiring early were a long way off.
No one is born with all the information needed to navigate life. We must learn and experience things and overcome them ourselves. But if I was starting over, armed with the knowledge I have now, it would probably be a much easier and straightforward process to achieve my personal and financial goals.
So what are my top money rules for graduates?
6 money rules for graduates
If I was starting over again this minute, knowing what I know now, this is what I’d do the minute I start my new job.
1) Ensure you are paying into your workplace pension
Honestly, as a past employer, I can count on one hand the number of people who talked about their pension. Not just graduates, but those of any age. Your workplace pension is part of your total salary and you should be asking about this as part of any negotiations with your employer.
Make sure you get this set up in advance of your first pay packet. Over decades a month or two might not make a huge difference to your overall balance, but paying yourself first and putting the money beyond your current use, is as much an emotional benefit as it is a financial one. You won’t miss what you never had is something I hear mentioned by many financial professionals.
2) Max out your pension contributions up to the employer’s match
Legally the employer must contribute 5% of your salary and you must contribute 3% unless you opt out from your workplace pension. Now you might look at the options here and think the 8% would be better in your pocket. But that’s not how it works. You are only contributing 3%, so you’ll be 3% better off. Choosing to contribute means your employer will add a minimum of 5% to that 3%. If you opt out of your pension, you technically leave 5% of your salary on the table.
And the more the employer contributes the better, so also look at your contract to see if there’s a maximum match they provide. Often if you contribute more, the employer will match this up to a level. And again, if you don’t fully utilise this you are leaving part of your total salary on the table.
Let’s look at a couple of examples. If you are on a starting salary of £20,000 and the employer is offering you the minimum pension contributions, the following example would be applicable.
5% employer contribution (£1000) + your 3% employee contribution (£600) = £1600
Your employer is paying £1000 towards your pension.
However, if they offer a matching contribution of say 10% the following would happen
10% employer contribution (£2000) + your 10% employee contribution (£2000) = £4000
Your employer contribution has doubled and you’ve added £1000 to your total salary.
Now those astute minds among us (you are graduates after all) will note that you need to contribute more to the pension to achieve an employer match. Putting money in your pension now is putting your money to work for you. Unlike heading away for the weekend, you still have the money and it’s working for you over the next 40 years to fund your retirement.
Most of the rich people I know are rich because they saved slowly over the entirety of their careers.
3) Live like a student
It’s all too easy to see the pound signs at the end of your first month of employment and head out on a shopping spree. Hands up if you see 20-year-olds driving around in BMW 2 series and you question how they can afford it.
I’ll let you into a secret….Many of them can’t.
Spending more as your income increases is called lifestyle inflation. If you don’t control it now, it will damage your future wealth-building opportunities.
When I first started out in my career I saved very little. I was putting money away for a house deposit, but beyond that, by the 2nd or 3rd week of the month, my salary was long gone. As I got pay rises or bonuses my lifestyle increased to meet my means and the income I had now grown accustomed to was needed to fund this.
And this is the story of most people. They start earning a wage and they spend their hard-earned money. Sure you’re entitled to do so. But if you live to your means is dangerous. You’re likely not saving enough and any changes to your salary can cause an emergency situation.
You might end up living beyond your means to fund your Kardashian lifestyle. Another pic for the gram anyone… (I don’t even really know what that means, but I think it makes sense). And going into debt at an early age is probably one of the worst things you can do for your finances.
Lifestyle inflation often means that many of us will forgo saving and investing for our future to live in the now #yolo. That can sound great in the moment, but as someone who speaks to people about money in their 30s, 40s and older, the majority wish they’d put a little bit more away for their future starting with their first pay packet.
4) Set a budget
Budgeting is the cornerstone of financial success. Look, you work hard and you are entitled to enjoy the money you earn. I’ll be the first to tell you to spend money on the things you enjoy. Because work is hard and the income you generate must motivate you to earn more or to live the life you want.
But money is dangerous and without a budget, people often spend more than they can afford. They spend more than they have and go into debt to fund the lifestyle they believe they deserve. Don’t be that person!
A budget and becoming a lifelong budgeter gives you the structure to enjoy the money you earn, but to do so in a manner that also builds wealth over the long term.
Even today as someone who is financially independent, we have a household budget. I have a personal budget also because this allows me to afford the things I value without worrying about ever running out of money.
Budgeting sucks for older people because it feels like they have to cut back on their spending and I promise you, very few people enjoy cutting back. But without those costs in your life and starting as early as you can, your habits now will change the direction of your life.
Here’s how I would budget! Take your nett pay (whatever is left after tax and student loan repayments) and set a 50/30/20 budget. 50% to spend on essentials, 30% on discretionary spending and 20% towards investing for your future, If you do this from your very first pay packet, then the habits it instils provide the freedom to enjoy your earnings safe in the knowledge that you are building wealth on autopilot.
5) Increase the investment budget each year
Generally speaking, the older you are, the greater the percentage of your earnings you need to save and invest for retirement. But that’s a general rule for people who don’t start planning for their future until a much older age.
A great rule of thumb for most people starting early who want to build wealth is to increase their investment amount by 1% per year. If you are starting out older, you might want to increase this significantly.
Leaving your financial planning to later in life removes the majority of options or opportunities you might want to take advantage of. Instead of saving for retirement at 68, you could choose to retire early or pursue financial freedom.
20 years from now, you might want to downshift in work or consider Coast FIRE. Unfortunately, some of you might have to do this for medical reasons or caring responsibilities. The more you can front-load your savings and investments, the greater choice and opportunity you will have in the future.
If I was starting out again, I’d focus on increasing my investment contributions each year. I’d do this in 2 ways. As my salary grows the value of your contributions will automatically grow by the same percentage. I’d also maximise this by increasing my investment budget by 1% each year. This will supercharge your wealth building while allowing the flexibility and freedom to enjoy your increased income.
And if you do things right, at some point in the near future, you’ll want to look beyond your pension to fund an early retirement. Pensions are only able to be drawn down from 10 years prior to the state pension age. For me, the age I can draw this down will be 58. I’m sorry to say you’ll probably not be able to withdraw your before the age of 60. Maybe older.
To fund any early retirement, I utilised my ISA allowance. The main differences of an ISA are that it is funded from your after-tax income. And unlike your pension which can be accessed 10 years prior to the state pension age, ISAs can be accessed at any age. This means that by contributing to your ISA, you can start knocking off the years until you retire before accessing your pension.
6) Invest in yourself.
The greatest return on your investment right now will be achieved by upgrading your skills and experience. Read extensively and ensure you get the right skills in place to climb the career ladder as quickly as possible.
I thought that when I left university I would stop learning. But the fact is, learning is a lifelong endeavour and those who choose to continuously develop and improve their skills do better in their jobs, can earn more money and create opportunities unknown to others.
In my early 20s, you could count the number of books I read on one hand. It wasn’t until I was 25 that I picked up the 4-Hour Work Week by Tim Ferriss. That book changed the course of my life and helped me understand that the direction I was taking wasn’t pre-determined. It gave me the knowledge and the confidence to start my own business. And that turned out pretty well for me.
The 4-Hour Work Week was the catalyst I needed to take my first step into self-employment. It’s 14 years later now since reading that book for the first time and I still read it every couple of years.
As an entrepreneur, you realise very quickly that the skills you once had only prepare you for those comparable tasks. Though I will say a degree in computing served me well in the endless IT issues a company has. Though I don’t remember my lecturer telling me that I’d say Turn it off and on again so often.
Everything else in business and life needs to be learned. You can learn from your own experience and mistakes, but I promise that’s more costly than learning from someone else’s. That’s what investing in yourself can help with.
Even if entrepreneurship isn’t in your future, investing in yourself, and building out your knowledge or experience of areas new and unfamiliar to you, is one of the greatest investments you can make as a graduate.
20 years from now I hope you look back on this article and the things I say and think that they’ve somehow shaped your own future. Life is tough, but if you make smart decisions now in your 20s, you’ll have the option and opportunity to make choices in your 30s, 40s and beyond.
Don’t forget to check out this article’s companion video over on the Foundered Money Youtube Channel.