Financial Advice To A Recent College Graduate

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Whitney Tilson’s email in which he provides financial advice to a recent college graduate.

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When I was in Yosemite National Park in early August, my friend slipped and mashed his knee, so I took him to the clinic for an X-ray (nothing was broken, fortunately) and a few stitches.

While I was sitting in the waiting room for an hour, I struck up a conversation with a young man whose friend was also getting stitches. I learned that he had just graduated from the University of Nevada, Reno, with a degree in engineering and was looking for a job.

When he learned that I was in the investing business, he asked me for advice. Here's what I told him...

First, get a job – a real job at a real company where you can put your engineering training to work. Don't even think of trying to start your own business, doing gig work like driving for Uber (NYSE:UBER), or working as a barista at Starbucks (NASDAQ:SBUX).

Then, I summarized the main points from this section of my book, The Art of Playing Defense, and e-mailed him a PDF of the entire book...

Loss of Wealth

I'll acknowledge that the calamity of losing your wealth is a high-class problem (it can only happen to people who have money!).

If you're fortunate enough to have a comfortable income and healthy savings, it might be nice to think about making even more, but it's far more important to make sure you don't lose what you already have.

Ironically, the surest, fastest way to get poor quickly is to try to get rich quickly. I've known people who spent their whole lives building up their savings only to lose it all in some crazy, half-baked scheme. Common examples include investing everything in their own new business – or someone else's – and it fails; speculating in penny stocks; day trading stocks or, worse yet, options; or getting duped by some online or phone fraudster. Millions of people are ensnared in these traps every year.

Another way to become poor, albeit somewhat more slowly, is to lose a good job and not be able to replace it. Or get divorced – boom, there goes half your wealth, plus expenses usually rise (two homes, less favorable tax treatment, etc.).

But the most common way to get into financial trouble is to spend more than you earn (after taxes). What this means is that every year, you need to borrow money to fill the gap – and there are lenders galore who will sell you – at a steep price – all the rope you need to hang yourself: credit-card companies, installment lenders, auto dealers, and so forth.

To be clear, certain types of debt are fine. It often makes sense to take out a subsidized student loan for a high-quality education or to buy a reasonably valued house with a fixed-rate, low-interest, tax-deductible mortgage. But otherwise, it's usually best to avoid debt.

Our economy and, in particular, our financial system is, in many ways, incredibly predatory. It makes it so easy to spend, luring people into living above their means. It is imperative that you resist this siren song. No matter what your income, figure out a way to live within it.

Develop Good Financial Habits

If you want to build wealth and live comfortably someday, you need to develop good financial habits. A 1996 book called The Millionaire Next Door shaped my thinking on this topic. The authors refuted many misconceptions about financial success, chiefly the idea that to become wealthy, you have to inherit money or have a high-paying job like a Wall Street banker, celebrity, or professional athlete.

Instead, the authors discovered that the most common job among millionaires was running a small private business. The second most common was a professional like a doctor or teacher.

But, in a fascinating finding, it turned out that income level was only moderately predictive of whether someone would become a millionaire. More important was whether someone lived beneath their means, year in and year out. In their survey of millionaires, the factor that most closely correlated to whether someone was a millionaire was whether they answered "yes" to the question: "Is your spouse more frugal than you are?"

Doctors, on average, earn quite a bit more than teachers. Yet, relative to their income, they are less likely to become millionaires because they tend to spend all – or more than all – of their high incomes on big houses in upscale neighborhoods, new cars, country club memberships, fancy vacations, private schools, and so forth.

Meanwhile, teachers are far more likely to become millionaires than their incomes would predict because they tend to live frugally.

My parents, both teachers, are perfect examples. They can squeeze a dollar until it screams. Growing up, we almost never went out to eat – going to Friendly's once a month was such a treat! My mom clipped dozens of coupons from the circular in the Sunday paper, and when she came home from the supermarket, would crow about how much she'd saved. And she bought most of our clothes at second-hand stores. She still tells my sister and me that our costly educations were funded by her thriftiness.

We never had a new car. My dad is a good mechanic, so we always bought 10-year-old cars that he would nurse along for years. I remember in the 1980s when we lived in western Massachusetts, we had a beaten-up 1960s vintage Mercedes. Its heater had stopped working long ago, which was a big problem during the bitterly cold winters. But no matter – we all bundled up in our down jackets and used de-icer spray on the inside of the windows.

Similarly, Warren Buffett, despite being one of the wealthiest men in the world, is still very frugal. He could afford to live in a massive estate, but instead has lived in the same house for 61 years! When he first started flying in a private jet, he felt so embarrassed that he nicknamed it "The Indefensible."

Save and Invest

Once you've developed good financial habits and are saving money every year, you need to invest your savings wisely.

The good news is that it's not hard.

First, max out your retirement plan(s) like an IRA or 401(k) – especially if your employer will match at least some portion of it (this is free money – take it!). Tax-deferred savings are much more valuable than taxable ones because you won't have to pay taxes on your realized gains each year. The difference over time is enormous. Also, because there's a penalty for taking the money out before you're 65 years old, you're less likely to do something stupid with it.

Ideally, set up automatic withholding from your paycheck into your IRA (or another retirement fund) – this makes it easier to save because you never see the money.

Then, set up a plan such that the moment the money hits your account, it's automatically invested in an S&P 500 Index fund. (If you want to set aside some money to invest on your own, that's fine – sign up for my newsletters at Empire Financial Research to help you do so – but index most of it.)

Finally – this is key – don't look at it! Just let it build, year after year, decade after decade. Whatever you do, don't panic during times of market turmoil and sell – just about everybody who does this has terrible timing, selling at exactly the wrong time (for example, in March 2009 or 2020).

Consider the extreme case of my sister, who had a retirement account at her old employer, then switched jobs – and forgot about it! Years later, she remembered it – and discovered hundreds of thousands of dollars (!) because she'd done everything right up front: her employer automatically withdrew the maximum retirement contribution from her paycheck and then invested all of it in an S&P 500 Index fund.

When my parents moved to Africa 24 years ago, first to Ethiopia and then, nine years later, to Kenya, where they've since retired, I took charge of their financial affairs. Though neither of them had ever had a big salary, they had both worked for their entire careers, earned decent incomes, and lived super frugally. As a result, they had built up a nest egg of around $800,000.

But they were much too conservative in how they'd invested it. Though they were still in their mid-fifties and would likely work another 15 years and live into their nineties, their savings were mostly in cash and bonds – an allocation more appropriate for eighty-year-olds.

So I put a third of their savings into my hedge fund and another third into an index fund, such that two-thirds of their savings were in stocks.

It was the right call. Two decades later, they're in their late-seventies, and their net worth is multiples of what it once was. They're comfortably retired – though you wouldn't know it from how frugal they still are. When they came back to the U.S. for a couple of months last summer, as they do every year, my mom refused to get a SIM card for her Kenya cell phone that would allow her to make and receive calls, get her e-mail, etc., because it cost too much: one dollar per day!

Best regards,


P.S. I welcome your feedback at [email protected].