A Young Professionals’ Guide to Personal Finance

Michael D. Breidenbach

For over 10 years, I have advised dozens of college students, recent graduates, and young professionals on internships, job offers, and how to manage money after graduation. There’s a lot to consider, and although I’m not an expert (see disclaimer below!), I have learned a few things in my own personal finance journey that I hope will be helpful to college students, recent college graduates, and young professionals.

We’ll cover some principles of personal finance and then how to negotiate your job offer, create a budget, prioritize your savings, choose a savings account, establish credit, invest for retirement, and decide whether to rent or buy a house.

1. Principles

Principle 1. Money is not the root of all evil, but neither is it the key to happiness (see Thomas Aquinas). As with all human activities, the proper stewardship of money can be an occasion for practicing virtue.

Principle 2. The power of compound interest. Compound interest is when you earn interest on both the initial amount of money that you’ve invested and on the interest you earn along the way (that is, earning interest on the interest you’ve already earned). For example, if you invest $10,000 in a savings account with a 5% interest rate, you are earning 5% not just on that initial $10,000, but also on whatever interest has accrued along the way. In 5 years, compounding monthly, that $10,000 would grow to $12,835. Compare that with an account that did not compound: $12,500. In this example, you earned $335 more with an account with compounding interest than with an account that did not compound the interest.

That may not seem like much, but over the course of your working years, it really adds up. If we take that initial $10,000 at 5% interest rate and extend it for 40 years, your account balance would be $73,584. A non-compounding interest account at the same initial investment ($10,000), interest rate (5%), and duration (40 years) would result in $30,000. In this case, compounding interest would make you $43,000 more!

There are two lessons here. First, compound interest makes you more money, especially in the long run. Second, it’s important to invest when you’re young, even if it’s just a little money, to take advantage of the power of compound interest.

Principle 3. Opportunity costs. An opportunity cost is the thing that you forgo when you chose to do one thing rather than another. For instance, an opportunity cost of going to see one movie at the theatre is not seeing a different movie at the same time at that theatre. The principle of opportunity cost is incredibly important in personal finance because it forces you to think about efficiencies. For instance, does it make sense for you to spend 3 hours shopping for groceries when you could pay someone $15/hour to do it for you? The cost of paying someone is $45, which may be worth it, all else being equal, when you consider that you could be making $100/hour in a side hustle, or spending more time with your spouse or children, or simply relaxing after a long work week. Of course, it may pain you to spend $45 on something you could easily do. But most of the time we pay other people to do things that we could do ourselves—but that they can do more efficiently. (Buying eggs at the store are relatively cheap and hassle-free compared to what it would take me, a non-farmer, to buy, feed, and care for hens in my backyard).

Principle 4. The time value of money and interest rate arbitration. Many of your economic decisions can be translated into interest rates, which is an expression of the time value of money. This helps you compare different options that seem incomparable at first. For instance, should you take a cash incentive offer now or 0% financing for 5 years for a $40,000 car? That depends on what you think having the money now is worth for what you would have paid for the car. If you assume that you can invest that money at 2% (like a simple savings account), adjusted for 1% inflation, then after five years you would have about $2,000. So, if the dealer offers you $2,500, then that’s a better deal (unless you need to have that $40,000 in the bank for your emergency fund—ideally, you shouldn’t pay for a car with money you don’t already have).

Principle 5. Good habits. Check your finances regularly, neither obsessively nor delinquently. Pick a day – for example, Friday, which is often a payday – to check the status of all your accounts so you can evaluate where you are each week. Chart the progress of (1) safety bucket (see below); (2) retirement; and (3) overall net worth (all assets minus liabilities) in Excel. Make annual goals (e.g., reach safety bucket by the end of the year) and their track progress.

Principle 6. Buy quality. Buying things that are more expensive but that you won’t need to replace for many years is typically better than buying cheaper things that will break and/or that you’ll get tired of quickly.

2. Should I negotiate my job offer? How?

Before or soon after graduation, you will need to consider job offer(s). Ultimately, accepting a job offer is your decision, but it’s important to think about negotiating the offer before you accept it. Negotiating an offer may feel uncomfortable or risky: you may feel happy just to have a good job after graduation or think that negotiating will jeopardize your offer or a good relationship with your future employer. It is true that negotiations can be difficult, and it may not suit everyone. But you are generally in a good position to negotiate once you receive an offer but before you accept it. Once you accept an offer, your bargaining power diminishes: asking for a pay raise, for example, is always possible later, but you have the most power with an employer when you have an offer (or a competing offer with a different employer). As long as your negotiation requests are realistic and conducted in a professional manner, you can reduce the likelihood that it will backfire and increase the chances that you get at least some of what you want.

What items can you negotiate? The most common request is a higher salary. This is important, especially for entry level jobs, because your starting salary will be the baseline for future cost-of-living adjustments, merit raises, and jobs elsewhere. But since you are starting your first full-time, salaried job, there may not be too much room to negotiate a higher salary. It’s best to do research on the salary range for your position in your area by searching online or asking people in your profession. After finding a reasonable salary range for your position with your experience in your area, you might ask for the higher amount in that range. Keep in mind that some companies’ budgets might be fixed (no salary increase is possible) or fairly inflexible (perhaps 1-5% of the initial salary offer may be possible).

What about your benefits package? Many benefits—medical, dental, vision, and life insurance, retirement matching benefits, paid/unpaid maternity/paternity leave, paid time off, sick days, and so on—are often the same for all employees and usually non-negotiable. Some things that may be negotiable are the start date for the position, a sign-on bonus, selecting office space, flexible work schedule, remote or partially-remote work, one-time moving expenses, job opportunities at the company for your spouse, extra paid vacation days, etc.

Before you start negotiating, read some advice on the best strategies. Some suggestions:

3. How do I create a budget? 

Step 1. Add up your expected annual income from your employer, miscellaneous income, side hustles, etc.

Step 2. Tally your projected monthly or annual expenses. Here’s a list of possible (but not exhaustive!) expenses to get you started:

Home Expenses
Rent or Mortgage (principal and interest)
Renter’s or Homeowner’s Insurance
Homeowner’s Taxes and homeowner’s association fees
Lawncare
Pest control
Electric
Water
Cell phone plan
Cable
Internet
Furnishings/appliances
Maintenance/supplies 

Transportation
Auto insurance
Car loan payment
Fuel
Bus/taxi/train fare
Car maintenance and repairs
Registration/license
Tolls 

Health
Health insurance
Dentist insurance
Vision insurance
Prescriptions
Out-of-pocket expenses 

Education
Student loan payments
Tuition
School supplies
Tutoring services
Specialized therapies 

Daily Expenses
Groceries
Clothing
Babysitting
Salon/barber and cosmetics
Pet expenses
Home supplies

Entertainment
Eating out
Video streaming services
Music
Theatre, concerts, museums
Books
Vacation (rental/hotel, flights, etc.)
Hobbies
Newspaper/magazine subscriptions

Gifts and Donations
Birthday, wedding, anniversary gifts
Donations to charities

Miscellaneous
Postage
Bank fees
Legal fees

Step 3. The goal is to have savings left over after all your expenses. Now follow the next topic to see how to prioritize your savings.

4. How should I prioritize my savings?

Hopefully you are now earning more than you are spending. What should you do with that savings?

Step 1. Pay off most of your debt (except mortgage). For most loans—student debt, car loans, credit card balances—the interest rate is far more than what you could reasonably gain by investing that money (oftentimes, even in high-risk investments). Based on Principle 3, you want to make economic decisions based on interest rate arbitrage. So, if your credit card is charging 20% on your balance, there’s no way you could reasonably make more than 20% by investing the money that you would have used to pay down the credit card debt. Therefore, you should pay down the credit card debt. At the very least, you should be making your monthly payments on all debt. (Mortgage debt should be considered differently, which I will explain later.)

Step 2. Save 6 months of your family’s combined income into a safety bucket. This is necessary in case: (1) One or both income earners lose his/her job. This will allow the time and expense necessary to find another job. (2) The family experiences an unexpected and serious expense, often medical emergencies that require an income earner to take time off (and possibly the other income earner to stay home to care for the other spouse and/or children). (3) You want to take advantage of a great deal that requires a large amount of cash.

At the same time, you should participate in your employer’s retirement plan account at least to max out on the employer’s matching contributions. It’s free money from your employer. (More on saving retirement later.)

Step 3. Once you have paid down all your non-mortgage debt, saved 6 months of annual family income, and invested in the maximum matching contribution for your employer’s retirement account, you can start saving for a down payment on a house or, if you’re already a homeowner, both spouses can seek to max out on their yearly IRA contributions. The higher the down payment you have when purchasing a house, the better terms you will have with your mortgage (lower interest rate, etc.), generally speaking.

There are two kinds of IRA accounts: traditional and Roth. In general, you should pick the Roth IRA when you are young since you anticipate earning more later in your life (or think that taxes will go up in the future). That’s because you contribute to Roth IRAs after you have paid taxes on earning that money. But according to current law you won’t have to pay taxes when you take that money out when you retire. So, your money will grow tax-free during the life of your Roth IRA account. If you want to reduce your tax burden right away, you can contribute to traditional IRAs with earned income that is not taxed. However, when you take that money out later, you will be taxed (and therefore any growth in that account will be taxed as well). You can open IRAs at most major investment companies and banks (Vanguard, etc.), so you have maximum flexibility and can choose the most inexpensive platforms and index funds to invest (like Vanguard). (You can even invest in alternative investments like real estate with an IRA, but that’s more advanced.) Once you have maxed out your IRA, you can return to your employer’s 401(k) or 403(b) and continue to invest up until the IRS limit as you see fit.

Step 4. Once you have done all of this, you are now free to put discretionary money in your Aspirational Bucket (higher risk investments), which can be a personal brokerage account (such as ETRADE), real estate, a business startup, etc.

5. What kind of savings account should I have?

Your savings account should be: (1) FDIC insured in a trusted bank and (2) liquid (meaning you can take out money very easily without penalty fees), such as a savings or money market account. A Certificate of Deposit (CD) or U.S. Treasury savings bonds are not totally liquid since there’s a penalty to take out money before the specific term is over (for example, a 9-month CD). A very short-term CD or treasury bond is fine, but just be sure it has a higher interest rate than the liquid savings accounts to make it worth it.

Go to Bankrate or a similar comparison-based site to find competitive rates. Do not necessarily settle with the bank that you already have. It’s okay to have multiple bank accounts. Only use reputable, trusted banks, which can include online banks now, but do some research before you open an account.

6. Establishing Credit. Are credit cards necessary and why? What type of credit card should I get?

Credit cards, or other types of loans, are necessary to build a credit history. Even in college, consider getting started on building your credit—as long as you have the cash to pay it off every month. Building a credit score will help you in the future with your ability to get a mortgage because the mortgage lender will see that you can be trusted with credit based on your payment history to your credit card. (A good credit score can also help with taking out a car loan and other loans—but I generally discourage any loans other than a mortgage.)

Pick the credit cards that provide the most cash back as well as rewards based on your preferences. A simple cash back rewards program is usually preferable to “perks” or “benefits” like hotel stays or airline miles, since often those benefits typically translate into less than 1% cash back, unless you are really clever with how you use them. And you may not always want those rewards; sometimes you just need more cash for more basic things. Individual results vary.

Once you have established your credit by paying your credit card balance monthly and any recurring loan payments, you can check your credit score, which is how institutions determine whether you are a good credit risk for future loans such as a mortgage. For more information about obtaining your credit score (typically for free), visit the Consumer Financial Protection Bureau webpage.

Finally, if you don’t anticipate taking out a loan for the foreseeable future, I recommend freezing your credit for yourself, spouse, and children at the three main credit bureaus: Equifax, Experian, and TransUnion. Each bureau has a separate process to do this, but it’s free, and you can do it yourself fairly easily. Freezing your credit will protect you and your family members from people opening credit cards, loans, etc. with your Social Security Number if your identity is stolen.

7. Should I invest in stocks or bonds for retirement?

In your retirement accounts and “aspirational bucket” (see Step 4 above), you will have a choice of investing in stocks or bonds. For recent graduates and younger people generally, it may be smart to invest mostly, or even exclusively, in stocks. While stocks are typically riskier than bonds (that is, their gains and losses are more volatile, and there is a greater possibility of losing money), in the long run stocks have outperformed bonds historically. That is, even considering the inherent higher risks of owning stocks, stocks have performed better in the long run than bonds. Even if you don’t invest all your retirement and “aspirational bucket” money in stocks, it may be worth having most of your allocation in stocks when you are young. (As always, read the disclaimer at the bottom.)

To avoid high fees, you may consider investing in low-fee ETFs (exchange-traded funds) from companies such as Vanguard. You buy an ETF like you would an individual stock. Basically, an ETF is “a basket of securities [stocks] that tracks or seeks to outperform an underlying index.” An example of an index is the S&P 500, which tracks the top 500 companies listed in US stock exchanges. So, if you buy an ETF that tracks the S&P 500, then you are investing in a slice of the performance of each of those 500 companies. This is an easy, low-fee, and generally less risky way of investing in the broad US stock market without having to research and choose individual stocks.

8. Should I rent or buy a house?

It is smart to rent the first year out of school because so many things in your life are changing, and renting for a year allows you to get your bearings on where you want to go and what you want to do. To make your money back on top of the real estate agent’s selling fees you generally need to stay in your house for several years in most housing markets.

The general guidance is to put no more than 33% of your monthly paycheck toward rent or a monthly mortgage—ideally, only 25%.

If homeownership seems like a mere dream, consider moving to places that have a more reasonable cost of living if you can find a good job there. There are lists of ideal places to live for those starting a career that rank cities based on average starting salary and cost of living. New York, DC, and LA do not top the list!

Disclaimer: Please note that I do not provide tax, legal, financial, or accounting advice. I am not an attorney, accountant, or financial advisor, nor am I holding myself out to be, and the information contained on this website is not a substitute for tax, legal, financial, or accounting advice from a professional who is aware of the facts and circumstances of your individual situation. I’ve prepared these points for informational purposes only, and they are not intended to provide, and should not be relied on for, tax, legal, financial, or accounting advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. I have done my best to ensure that the information provided on this website and the resources available for download are accurate and provide valuable information. Regardless of anything to the contrary, nothing available on or through this website should be understood as a recommendation that you should not consult with a tax, legal, financial, or accounting professional to address your particular needs. I shall not be held liable or responsible for any errors or omissions on this website or for any damage you may suffer as a result of failing to seek competent financial advice from a professional who is familiar with your situation.

© 2024 Michael D. Breidenbach