5 Financial Tips for College Graduates

Last Updated May 12, 2010 8:46 PM EDT

I recently got an email from a college senior, who was looking for financial tips for college graduates.College graduation ceremony
She's lucky. She's lined up a job and wanted to know how she should start investing. Here are the financial tips that I passed along to her:

Financial Tip No. 1: Start Now

Young college graduates don't have much, if any money, in the bank when they graduate, but they enjoy a huge financial advantage over their parents and grandparents. They can maximize their savings with the power of compound interest.

Young college graduates, who start saving now, can save far less money and be much wealthier than Americans who realize in their 40s and 50s that they have to get busy stashing money away. Think of compounding as a snowball that has enough time to roll down an entire mountain instead of just one slope. That's going to be one big snowball.

Financial Tip No. 2: Start a Roth IRA.

Opening a Roth IRA is a must. I'd put the Roth IRA into the same category as other indispensable things such as seat belts, Golden Retrievers, birthday candles and second chances.

Here's an explanation of why a Roth IRA is superior:

Why You Want a Tax-Free Roth

Financial Tip No. 3: Invest in Index Funds

Stick with low-cost index funds. All my money, my kids' money and my husbands' money is sunk into index funds. I prefer Vanguard index funds, which are cheap and cover nearly all asset classes.

Here's why index funds are superior:
Best Index Funds: 8 Picks

Financial Tip No. 4: Choose the Best Starter Funds

Initially, you won't have enough money to spread among different investment categories so you might want to start with Vanguard Total Stock Market Index Fund VTSMX.

Another suggestion: Vanguard Small-Cap Value Index Fund VISVX. If you look at the performance of the major investment categories over many decades, small-cap value is king. This is the fund that my teenage son selected for his Roth.

Once you've accumulated more money, make sure you end up with a large-cap and a small-cap index fund, as well as an international stock index fund in your portfolio. I see no reason to bother with bond funds when you're in your 20s unless you're an inveterate nervous Nelly.

Financial Tip No. 5: Feed Your Roth Automatically

If you don't pay yourself first, chances are you will never contribute to your Roth. While auto-investing works great with 401(k) plans, most investors don't think to use automatic investing with their IRA.

Lynn O'Shaughnessy is the author of The College Solution and she also writes for TheCollegeSolutionBlog. Follow her on Twitter.

More on CBSMoneyWatch:

Best and Worst College Degrees by Salary

5 Hardest and Easiest College Majors

College graduate financial advice image by CarbonNYC. CC 2.0.

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