Attorney Dmitry Lev was quoted in Business Week in a feature article Bonus Babies: Digging Into the Lifestyle on new business school grads and on the best ways for them to spend their sign-on bonuses. The feature was written by Julie Gordon and published in the October 10, 2006, issue.
"Most experts agree that recent graduates should invest in a Roth IRA, for which most people qualify. "Giving themselves this kind of head start on saving for retirement will also give these new grads the incentive to contribute year after year going forward. On the other hand, those who do not start a retirement plan at this stage are more likely to put it off for another year, then another," says Dmitry Lev, a consumer bankruptcy and tax attorney based in Boston. If an investor begins contributing the current annual maximum ($4,000) early in his career, he will easily have $1 million by retirement, if not sooner, says Lev."
To expand on the issues raised in the article -- first of all -- what a dilemma: how to spend bonus money! But the same concepts I suggested for new business school grads are still sensible advice whenever a person walks into a not-so-small (and not-so-big) lump sum of money. This can happen unexpectedly, on a happy occasion, such as winning the lottery, or on a solemn note, like a small inheritance or a life insurance policy payment upon a passing of a family member.
My first suggestion to new grads and others alike, assuming there is no pressing financial emergency or overwhelming debt, is to invest in a Roth IRA. As I suggested in the article, disciplined annual Roth IRA contributions lead to great rewards with little required effort. And this is without considering the employer sponsored 401k type retirement plans, where regular contributions pay off even more with benefits like matching. Yes, I am advocating that anyone who qualifies should contribute to both their employers' 401k plans and Roth IRAs.
Clearly if a person is driving a clunker and needs a new set of wheels to get to work, this is a necessary expense. But instead of buying a brand new $50,000 Lexus and financing it for 8 years, a more sensible approach would be to purchase a sub-$15,000 car, which would be sufficient (though not extravagant) for most, and finance it for no longer than 3 years. My personal rule of thumb is that if one cannot afford monthly payments based on a 3 year car loan, then they cannot afford that car at that price.
For most students, paying off their student loans at once is probably not a good idea. Federal student loans have relatively low interest rates, and for that reason they are "good debt" rather than bad debt. Certain private student loans may carry significantly higher rates, and these should be paid down sooner.
In short, there is no better time to learn about the rewards of delayed gratification than when a new grad receives a chunk of money in hand. That money will take our grad much further and last him or her much longer if it is not immediately spent on the luxuries of "starting a new life."
Attorney Dmitry Lev assists persons seeking Bankruptcy protection in Massachusetts. In addition, Attorney Lev counsels and represents persons in taxation matters with the IRS and state agencies, and victims of unfair debt collection practices. Law Offices of D. Lev may be reached at (617) 556-9990 for a free consultation regarding a specific matter.