As my wife and I vacation in New England, visiting loved ones in Providence, Cape Cod, and Boston, we’re reminded of the recent college graduations we missed. This got us thinking about the importance of setting a solid financial foundation right after graduation. We want to share some tips with our nieces and nephews on how to reach financial freedom.
Our Graduation Reward System
About three years ago, we implemented a college graduation reward system based on cumulative GPA:
GPA | Monetary Reward |
---|---|
Below 3.0 | $50 |
3.0 – 3.24 | $75 |
3.25 – 3.49 | $100 |
3.5 – 3.74 | $200 |
3.75 – 3.99 | $300 |
4.0 | $500 |
We do this to encourage conversations about grades and reward hard work. Getting high grades is challenging, especially when you’re working to pay for your education. We also want to motivate the next generation in our family to pursue higher education, as it can be their best chance at financial success.
The Value of a College Degree
In our family, a college degree holds significant value. As immigrants from the Dominican Republic, it represents our path out of blue-collar jobs. My siblings sacrificed a lot to provide their children with educational opportunities, focusing on giving them the necessities to succeed academically.
A Message to Our New Graduates
Now that you’ve graduated, the world is your oyster. Some of you are already working, while others are job hunting. Once you start earning, you’ll have the means to buy nicer things, but remember: the best thing money can buy is financial freedom.
Why? Because financial freedom:
- Gives you the option to change jobs you dislike
- Allows you to help your parents in times of need
- Makes work optional rather than mandatory
- Provides peace of mind
- Lets you live life on your own terms
The Path to Financial Freedom
The formula is simple: spend less than you earn and make your money work for you. Invest the surplus and let it grow. Build your wealth one dollar at a time, starting now rather than waiting for a windfall.
Maximize Pre-tax Accounts
If your job offers a 401(k) or similar retirement vehicle, take full advantage by maxing it out. The 2024 contribution limit is $23,000. If you can’t max it out immediately, gradually increase your contributions until you reach the limit.
Pre-tax accounts often invest in index funds, allowing you to own shares in the world’s best companies. This shifts your mindset from consumer to producer.
The Power of Tax-Advantaged Savings
Let’s look at an example using 2024 tax brackets:
Assuming an annual salary of $60,000 and the standard deduction of $14,600, your taxable income would be $45,400. By contributing the maximum $23,000 to your 401(k), you’d lower your taxable income to $22,400, potentially dropping you into a lower tax bracket.
This strategy effectively shields money from taxes, allowing a larger base to accumulate faster. In this example, you could save thousands in taxes while building wealth more quickly.
Harness the Power of Compounding
The sooner you start saving and investing, the less you’ll need to contribute over your lifetime. Initially, growth may seem slow, but eventually, investment returns will outpace your contributions.
For example, if you contribute $500 monthly to your 401(k) for 30 years, assuming a 7% annual growth rate, you’d have over $600,000. Your total contributions would be $180,000, but compounding would add over $420,000 to your balance.
Our FIRE Journey
I started seriously saving in my 30s, while my wife began right after college. As a result, she’s retiring at 33! Although I wish I’d started earlier, I’m grateful to have found the path to Financial Independence, Retire Early (FIRE) when I did.
Since we began investing at the start of a bull market and maximized our contributions, our investment growth has become a significant portion of our portfolio. The gap between our contributions and returns continues to widen.
Investing Through Market Downturns
During the Great Recession of 2008, our investments took a hit. However, we kept investing, buying at a discount while others panicked. By the end of 2009, we had positive returns. This experience taught us the importance of staying invested for the long term.
Advice for New Grads
- Aim to max out your 401(k) contributions as soon as possible.
- Embrace frugality—there’s no shame in living like a “poor college grad” to build wealth.
- Minimize fixed expenses like rent, transportation, and food.
- If possible, live with family or roommates to save on housing costs.
- Put extra money from raises and bonuses directly into savings.
- Balance paying off student loans with retirement savings.
Remember, it all comes down to this: minimize spending, save aggressively, and invest wisely to reach financial freedom. You’ve got this!