By Professor Tim Calkins
This week, almost one thousand people will graduate from Kellogg with their MBA degrees. They will then embark on careers that will span decades. Last year I posted some financial advice for the graduates, and some people found that useful, so this year I’m sticking with the theme. Those who read last year’s post will notice some similar ideas.
I should note that I teach marketing, not finance. This advice comes from several decades of working, saving and investing, and many discussions with friends and colleagues about matters financial–not from the latest textbook.
Here are five pieces of advice for people launching their careers:
The key to financial success is fairly simple: save money. If you spend less than you earn, you have money to work with. You can invest it or reduce debts, and these are both good ideas.
Building up some savings gives you the freedom to pursue your interests. It also reduces your risk. Things can unravel quickly in life. Having some money in the bank is a bit of insurance for the rough times. There will be some rough times.
It all starts with spending discipline. You have to spend less than you make. So drive a cheap car and keep it forever. Buy a relatively inexpensive house. Go easy on fancy restaurants and fine wines. Visit Michigan instead of Tahiti. It isn’t really all that complicated.
Saving early in your career is particularly valuable because a little money today can become a lot of money tomorrow through the power of compounding.
2. Pay down debt
Corporate finance executives will often observe that debt is a positive. If you borrow money to invest in productive assets, you will usually increase your firm’s profits and stock price. Indeed, a company with no debt is rarely optimizing returns for stock holders.
But people are not companies. For individuals, debt is a burden. When you carry debt, you are paying interest month after month. This is bad for morale as well as your savings.
Paying down debt is a completely risk-free move that often provides a relatively good return. Remember, the people who loaned you money thought that it was a good financial investment, despite the risk that you would default. You can get the same return with zero risk. That is a good proposition.
It is fine to take a mortgage when buying a house, even if you have investments; you don’t want to sell stocks and incur capital gains taxes if you can avoid it. Debt can be a useful bridge. Just remember, once you have the mortgage, pay it off.
3. Buy stocks and hold them
The U.S. financial system is remarkable because it lets you buy stocks in hundreds of companies for almost nothing. Once you own a stock, there are no fees and no capital gains taxes.
I bought one of my first stocks back in 1995. I purchased 100 shares in State Street Bank for $3,357. I still own them and the position is now worth over $31,000. In the past twenty years, I haven’t paid a fee or any capital gains tax on this money. I plan to hold the stock for the rest of my life, so I’ll never have to.
If you invest in a mutual fund, you’ll pay a fee every year, and then you’ll pay capital gains taxes. Over time, a 1% annual fee becomes a very significant drag on a portfolio. Holding a stock is free.
Some people argue that buying individual stocks is too risky for small investors. I disagree.
If you buy thirty stocks completely at random, your return should be somewhat similar to the stock market as a whole. You might miss Apple, but you might also miss Enron. Some stocks will go up; some will go down. You can sell the losers and take the capital gains loss against your income. In other words, the government covers a portion of the downside.
The key is that you should almost never sell a stock. This is difficult. It is incredibly tempting to sell when a stock is up or down, but a trade is often a losing proposition. You have to both sell at the right time and buy at the right time.
So buy a few shares in different companies and then get back to working and playing with your kids. If you can’t bring yourself to just buy individual stocks, put some of your money in an index fund.
4. Keep things simple
Investing can be very complex. The financial world thrives on creating complicated products designed to exploit small mispricing opportunities.
My advice: avoid complexity. Instead, you should keep your investments as simple as possible. Work with just a few investment companies and limit your credit cards. Most important, avoid investments that you don’t understand, especially if they seem too good to be true.
When I was about eight years old I took a trip to Mexico with my parents. They were (and still are) fairly frugal, so we went to a free breakfast sponsored by a time-share company. Within thirty minutes, my parents were ready to buy several weeks of time in the development. It all felt fishy to me, a bit too good to be true. I recommended against it. That was a wise piece of advice, and my parents still tell that story.
If you keep things simple, you will understand your investments and sleep better.
5. Be generous
One way to save more money is to cut back on charitable donations. This is technically true, but it’s a bad idea. You should be generous.
There are two reasons to give to charity.
First, it is your obligation. The U.S. is a unique country. While we have fewer taxes than some countries, our citizens are generous. This isn’t the case everywhere. My children attend a French school in Chicago, and new families from France are simply baffled by the U.S. system of asking for donations. This is understandable, because in France taxes are exceptionally high but people don’t then contribute much to charities. The higher taxes compensate for the lack of giving.
The U.S. is different; people give back. Graduating from a great business school puts you in a rather select group of society. You have training, connections, and skills. As you progress through life, you should help others who didn’t have the same advantages.
Second, you should give because it is rewarding. Studies show that when you give away money you feel better about your life. This is a win–win proposition.
So find a cause you care about, and then support it consistently. In addition, if a friend or colleague asks you to support their cause, do so. If someone is walking for diabetes, support them. If they invite you to a charity dinner, attend if you can, and then be generous. These donations support good causes and they build relationships. Think of it as an investment in people and your community that will pay you back many times over.
And there you have it — financial advice for your bright futures. Now go forth, succeed, and do good things in the world.
Tim Calkins is a clinical professor of marketing at Kellogg, where he teaches marketing strategy, biomedical marketing and strategic marketing decisions. He also leads Kellogg’s Super Bowl Ad Review. His professional blog can be found at timcalkins.com.