Financial Advice for Graduates

Today is Kellogg’s commencement ceremony. Hundreds of students will shortly walk across the stage and receive their degrees. I’m here at Ryan Field in Evanston getting ready to march in with the faculty.

The graduates will then celebrate. And in the coming weeks they will begin their careers as business leaders.

It is a time for advice. During today’s ceremony, I suspect the speakers will offer suggestions on leadership, ethics and happiness.

I’ll provide some advice on money. I teach marketing, not finance, but after working for eleven years in the corporate world and twelve years in the academic world, I’ve learned a few things about managing funds.

 

Save

This is my most important piece of advice. You should set aside some money. Having funds in the bank gives you peace of mind; if things go poorly at work you will still be ok. It also gives you freedom; you can pursue interesting career opportunities if you don’t need a big income.

When I left Kraft to teach at Kellogg, my income went down by about 80%. I walked away from a good salary, a bonus and stock options. I was fine with the risk because I knew that I would survive even if it didn’t work out. I had enough saved up that I could cover the mortgage for quite a long time.

 

Buy and Hold

It is impossible to predict short-term moves in the financial markets. Anyone who claims they can do that isn’t telling the truth.

Over time, however, assets tend to increase in value. So buy stock in good companies and then hold on. Some of the stocks will go up in value. Others will drop like a stone. On average, however, the portfolio will do well.

The buy and hold approach has two other important benefits. First, there are no capital gains taxes. If you never sell a stock, you will never realize a gain. If you sell a few losers you will generate losses. Instead of paying a tax you will offset a small part of your income.

Second, there are no expenses. If you buy a stock and hold it you won’t ever pay a fee. You don’t have low expenses. You have no expenses.

 

Be Patient

As an individual, you are completely outmatched by investment professionals. Financial firms have access to incredible technology and investment techniques. On any particular trade you can safely assume you are losing out to someone.

Individuals have one advantage over investment managers, however: time. Financial wizards have to consistently generate income. If they have a bad year, they are at risk of losing significant assets under management.

We can be patient. I don’t really care if the value of any particular stock goes up or down next year. I hope that over the next twenty years the price will go up, and it should. I’m not concerned about short-term moves.

This gives the individual investor a big advantage. We can let the power of compounding kick in and patiently wait for things to turn up.

My grandfather used to keep all his stock certificates at the bank in a safe deposit box. On occasion he would stop by to look at the holdings. He couldn’t easily trade the stocks and he didn’t. Today it is easy to trade, but that doesn’t mean we should.

 

Be Generous

Giving away money is a wonderful thing. You help the causes you care about (like Kellogg!). You also feel good; research studies show that donating money has a remarkable impact on our happiness. We feel good about ourselves when we do it. So be generous and help people.

 

In the next few weeks, the new graduates will start receiving an income. This will be a good moment. It is also a fine time to save, buy and hold, be patient and be generous.

Good luck.

15 Responses to “Financial Advice for Graduates”

  1. Corey Blake Says:

    Loved this Tim. Great post.

  2. Karlo Teran Says:

    I think you can add pay down and avoid debt at all cost

    Greetings from tijuana mexico professor

    Sent from my iPhone

    >

    • Tim Calkins Says:

      Karlo—I agree. Debt is fine for a company but generally a burden for people. A mortgage is fine as long as it isn’t too big. I’m all for paying it down when you can.

  3. emitahill Says:

    Wonderful advice, Tim.

    Emita

  4. Abbas Mooraj Says:

    Great post Prof Calkins!

  5. Rahul Says:

    Always nice to get your advices Tim. would be curious to know your thoughts on buying property and mortgages

    • Tim Calkins Says:

      Rahul–I’m all for buying a house, especially if it isn’t too big. Big houses come with big tax bills and big utility bills.

      I think mortgages are fine (and you will need one even if you have a lot of investments…otherwise you’ll have to sell stocks when you buy a house and then pay a huge tax bill on the gains).

      Once you have a mortgage, paying it down becomes a pretty attractive option. It is a completely risk free investment with a reasonable return.

  6. Vincenzo Carrieri Says:

    Wise words Professor.

    Also, I’d strongly suggest spending some time thinking about assets allocation(Cash, Bonds, Equities). Time horizon, goals and tolerance for risk are typically the key factors in making this allocation.

    Vincenzo KH16

    • Tim Calkins Says:

      Vincenzo—A good addition. Sticking with an asset allocation is key…it forces you to invest in stocks when the market is down, and then forces you to put money in bonds and cash when the market is up. Both moves feel wrong but tend to be correct in the long run.

  7. Sambhav Karnawat Says:

    The generosity is what most people really miss out on. Thank you for reminding, Professor.

  8. Bob Carroll Says:

    Excellent advice Tim! I second everything you said. Related to the “save” advice, I’d add a great tool to help do that – “budget”. Contrary to my ingoing perception, it was the most freeing and beneficial financial move in 20+ years of work and marriage.

    • Tim Calkins Says:

      Bob–I completely agree. Keeping a budget is a huge help; it keeps spending in check when needed, and it frees you to spend when you can.

      That said, I think some people naturally budget and others don’t. My wife doesn’t spend a lot but has no interest in a budget. So we have separate accounts and that works well for us.

  9. Kellogg School Admin Says:

    Reblogged this on Kellogg MBA Students and commented:
    Following Kellogg Convocation 2014, Kellogg Professor Tim Calkins offers four pieces of financial advice for new grads.

  10. Rohan Says:

    Thanks Prof Calkins.

    A new student here – looking forward to meeting you in person!

  11. Finance Thesis Says:

    I think mortgages are fine (and you will need one even if you have a lot of investments. what you say rohan???

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