Back in May of 2011, I wrote an article for my professional society (www.IISE.org) magazine, titled “Graduate Finances.” After the 2008-2009 recession, I wanted to share some basic financial ideas with future graduates, so they’d have an idea of what to do when they get their first job. The article covered basic budgeting, investing, benefits. Etc. In the years since, I have had folks comment positively on the article.
Just recently, IISE has reached out to me for their new Podcast, and asked me to interview and discuss the article, and recent changes that might be made to the advice. The provided a list of questions they would be asking. I’ve included them below, and my answers to them.
Below are some starter questions to help prepare you for the interview, though I will surely ask additional questions based on the course of the conversation:
- This conversation surrounds an article you wrote for Industrial Engineer magazine (now ISE magazine) called “Graduate Finances,” and we’ll provide a link to the article on our show notes at the podcast website. You initially wrote it in early 2011, which was just a few years after the punishing fiscal bomb that was the Great Recession. What prompted you to give this advice to young engineers starting out?
- I had become very interested in investing and saving for retirement around the year 2000 (dot.com bust). When 2008-2009 hit, I saw a lot of people jump out of the market (rather than just let it sit) and knew that was the wrong answer.
- My professional IISE chapter often goes to our local colleges and presents/discusses issues with students, and I’ve spoken at regional and national conferences before. I found that most engineers didn’t have any financial knowledge from college or high school (almost no graduate does).
- I often got questions about what to do with their first job, and I wanted to provide some guidance.
- You open the article with “Day 1,” which typically involves an introduction meeting with a company’s human resources representative. Obviously, we’ve each been through this more than once in our careers, but for our younger audience who may be entering the real world soon after listening to this, what should they expect to learn about in that initial HR meeting?
- I’m assuming we are talking about financial aspects of HR. There will be a host of policies and programs that are not financially related that HR will bring forward.
- Other benefits that will save you money (insurance, legal, education, medical)
- Medical benefits – look for high deductible plan and an H.S.A. (Health Savings Account). This is almost a super Roth-IRA. You can save it before taxes, invest it, and then use it to pay medical bills later on
- I faced a battle with cancer a few years into my career and after joining my third employer (which just happened to be IISE). Before that, I will admit that I didn’t pay that close of attention to medical benefits and insurance details. Between youthful ignorance and newspaper veterans telling me that the insurance covered “next to nothing,” I lost sight of its value. Having cancer changed that for me. What would you suggest engineers ask HR about on Day 1 regarding their medical coverage?
- They need to understand the costs involved and relate that to their potential budget. Coverage is a key point. Most company’s benefits will cover catastrophic issues, but the key is the deductible. How much do you want to pay out of pocket before the medical gets picked up.
- Often you can get a benefit/cost reduction for regular checkups, not smoking, etc. Look into this.
- For the younger ones, most feel their invulnerable, so they don’t pay much attention to medical. I would suggest they look into a medical plan with a high deductible with an HAS – a Health Savings Plan. This lets you save money before taxes, and you can invest it in the market and let it grow. It can be used to pay medical expenses now, or 10+ years from now.
- I don’t recommend an FSA – you have to spend that in the calendar year, and it’s a tracking nightmare.
- I started my career in newspapers (back when people still subscribed to their local paper en masse) and I remember feeling a lot of pride when I received my first paycheck. It said to be that I was an adult and a working journalist. Unfortunately, it was only around $750 after deductions for two weeks of work and I didn’t fully grasp the expenses that were about to be dumped on top of me, like student loans and living expenses (my folks weren’t all that cool with me living at home after graduation). What was your experience like as you were coming into adulthood and suddenly trying to learn your new job as well as set yourself up for a financial future? In what ways did you feel like you got it right early on and where did you make your biggest errors?
- I was an anomaly getting out, because I went into the military, so the first 5 years I had government housing, medical, etc.
- Once I got out, my wife and I had to learn a lot of this (housing, medical, etc) but we were a little more mature, and had our spending in line.
- For someone starting out, I’d look for someone maybe 5 years older they could use to mentor them on this. There is also some good information on the internet. I’d look into the FIRE community for this.
- What insights should young people entering the American workforce understand about deductions removed from their pay? Where is that money going?
- Taxes (Fed, State, local) – obvious. Should be considered when you are looking at jobs.
- Social Security/Medicare – Tax to pay for benefits to older Americans
- Unemployment – paid into by you and your company
- Other – state dependent (my state has Family Leave, Disability, Workforce Development)
- Your choice in benefits – Medical, Dental, Vision, 401K, Insurance, etc.
- The combination of career success, bad luck on the health front and poor decision-making, among other factors, led me to a lifestyle rooted around minimalism – not in the “live like a hermit” context that many people believe it to be, rather to develop an ability to determine what has the most value and what has no value. And it’s become evident to me over my adult life that budgets, even simple ones drawn on a napkin, can go a long way into showing me just where I stand when it comes to income and expenses. What budget methods would you recommend to graduating students, such as the “60 percent” rule or the “50/20/30” model?
- I gave several versions in the article, but I am a real enthusiast for the “pay yourself first” model. Do your investments first (401K to at least the match, HAS, Roth IRA) maybe 10% – 20% of your paycheck.
- Every year from that point bump it up at least 1% (i.e. if you get a 3% pay raise, one third of that goes to new investments like 401K or Roth IRA)
- Then you have your 80% – 90% left to spend.
- Budget for any debt (student loans, etc).
- What is left over is what you have to live on (housing, food, transportation, etc)
- Remember that, unless you have a real disaster, the first couple of years will be the tightest. Every year, every pay raise, every debt payoff, it will get a little easier
- For anyone who has been out of college in the past 20 years, we’ve witnessed a lot of events that have made an impact on the national and/or global economy – the Sept. 11, 2001, attacks; the housing market crash in 2008; and our current pandemic. These types of events have made investing a shaky proposition for me personally, but I’ve done more of it in the past few years albeit conservatively. I’m fairly certain you’re not one to recommend investing in Bitcoin or other risky ventures. Unless I’m wrong, what factors do you recommend young graduates consider when it comes to investing? Should they start investing in stocks and bonds right out of the gate or focus on their 401Ks and/or Roth IRAs, or anything deemed low risk?
- The biggest issue, I think, for young engineers is the long term nature of investing. Most people at 22 can’t envision 10 years from now, let alone 40 years.
- I’d have a “core” of investments in the basics (401K, Roth IRA, etc) and if you’re young, I’d invest almost 100% in stock index funds. The market has never been down over a 20+ year period, and young folks have that sort of timeline for their investments. As you get older, you can shift more to bonds or other fixed investments.
- Index Funds/ETFs!
- Maybe have 5% – 10% of your funds for “fun money” where you invest in Bitcoin, Tesla, etc. Just assume that you will be gambling.
- Again, I’d do some reading on the FIRE movement (Financial Independence, Retire Early). The concept there is that if you bust your butt to pay off debt and invest, you can get yourself into a situation where you are Financially Independent and don’t have to work. Then you can do the sort of work you really enjoy!
- In the original article, you listed about a dozen sources for further reading and education on money and personal finance, but it’s been a long decade since “Graduate Finances” first published. Do you have any new favorite digital resources like websites or podcasts that have a better reach on younger generations? Any books or authors that you would recommend as well?
- Take everything with a grain of salt. Everyone’s situation is different, and some folks like to take more risk than you may be comfortable with.
- As you wrote in your article, ISE students graduate with a strong foundation of functional knowledge applicable to their careers – the ability to research and investigate, to analyze data, etc. Should colleges and universities provide more opportunities or add emphasis on personal finance education? Are there opportunities for parallel teaching (think the Daniel/Mr. Miyagi relationship in “The Karate Kid”… “wax on, wax off; sand the floor; …”)?
- I think there should be a personal finance course as an option, but that is just me.
- If not, at least provide additional opportunities to study this
- The issue is that most young folks just don’t think personal finance is an interesting topic. Often discussions of money are considered “dirty” in our culture.
What would you add or change to these?
Mr. 39 Months