Entry-level savings for recent grads

Most graduates entering the "real world" are already in debt. Our expert gives insight about how to start a healthy financial life.

By Walter Updegrave, Money Magazine senior editor

NEW YORK (Money) -- Question: How much money should a person who's just graduated from college have in savings to get off to a healthy start in his financial life? - Mitchell, Turlock, Calif.

Answer: Aside from a lucky minority who have a trust fund or nice little nest egg that their parents or relatives set aside, most people moving into the workaday world for the first time have virtually nothing saved since they haven't been earning money regularly.

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Indeed, many people in your position start out in the hole - that is, they're carrying college loans. I know that was the case for me when I graduated from Penn back in the Stone Age (1974). If anything, the debt load for newly minted college grads has risen considerably since then.

So I think the right question to ask isn't how much should you have saved but how much should you be saving once you start bringing home a paycheck.

It would be nice if I could give you a definite dollar amount or percentage of salary that you should set aside monthly to ensure financial success. But life isn't quite that neat.

Your ability to save depends on any number of variables, including what you earn, what you owe coming out of college and how you live.

What I can do, though, is give you a few guidelines to get you off on the right foot.

And since I know that you've probably got a lot going on in your life right now - settling into a job, finding a decent place to live, building a social life - I'll keep my advice simple. In fact, I'll boil it down to just three steps.

Step 1: Live well but not extravagantly

Have fun and enjoy yourself. After all, life would be pretty boring if you focused only on building wealth. But don't live so large and lavishly that you effectively scuttle your chances of achieving financial security.

So find a nice place to live, whether a home or apartment, but don't saddle yourself with a crushing mortgage or rent payment. Similarly, when it comes to wheels, think basic transportation more than Muscle Car or Status Mobile. And electronic gadgets are nice, maybe even a necessity these days. But you don't have to have them all, or you can hold off on some until the prices come down.

Step 2: Rev up that 401(k)

All in all, it's a lot easier to save money if you adopt a lifestyle a few notches below your earnings capacity. If you try it the other way around - spending all you make (or more) right out of the gate - then saving will require painful cutbacks from the lifestyle you've gotten used to. And the sad truth is, many people never make that adjustment.

We know that about a third of people who are eligible for their company's 401(k) don't participate. And the sign-up rate is even lower for younger people. About half of workers in their 20s don't join their 401(k) plan, and some surveys suggest the number who don't sign on is even higher.

A 401(k) is about the easiest way you're ever going to find to save on a regular basis. The money comes out of your paycheck before you can get your greedy little mitts on it. And since your 401(k) contribution isn't taxed (nor are the earnings) until you withdraw the money later on, you also get a neat little tax break.

Throw in the fact that most employers will kick in a match - most commonly 50 percent of what you contribute up to 6 percent of salary - and you're looking at the closest thing to a free lunch there is in this world.

So at the very least sign on and contribute enough to take advantage of your full employer match. If you can, increase your savings rate to 10 percent to 15 percent of your pay. If you can do more, then contribute to a Roth IRA. (Learn more about the advantages of a Roth here.)

And don't let uncertainty about how to invest your 401(k) contributions stop you from getting aboard. Just stick the money in a target-date retirement fund if your plan offers one. If that option's not available, then stick, say, 80 percent or so of your contributions in a stock index fund and the remaining 20 percent in a bond index fund.

If index funds aren't available, then just put your money into a diversified stock fund that concentrates mostly on large-cap stocks and a diversified bond fund that invests in government and/or high-grade corporate bonds with short-to-intermediate maturities. You can always go back and refine your strategy later if you want after reading our Money 101 lessons on Retirement Planning, Asset Allocation, Basics of Investing and Investing in Mutual Funds.

Step 3: Carpe diem, baby

Once you've started saving and investing on a regular basis, you'll have done the lion's share of the work as far as achieving prosperity is concerned. But you should also stay open to ways to improve things. In other words, be ready to seize the day, grab opportunities.

Again, I'm not saying your life has to revolve around accumulating big balances in retirement and other investment accounts. But there's nothing wrong with, say, keeping an eye out for a better job that (in addition to being more challenging and rewarding) can pay more and allow you to save even more.

Similarly, if you get a big bonus or sizable tax refund, indulge yourself with some of it, but try to stash at least half in an IRA or other investment account. These extra additions to your investment kitty can add up over time, and they'll add an extra measure of financial security throughout your life and allow you to live better in retirement. (Yeah, I know retirement seems like a far-off mirage at this point, but, believe me, it comes up faster than you think.)

So don't concern yourself at this point with how much you have saved, if anything. Instead, try to arrange your life so that, even as you're having a ball, you're still saving on a regular basis.

As for my three simple steps, I can't guarantee that following them will ensure financial prosperity. But I can definitely say your odds are a lot higher than if you don't.


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