We are in an interesting position coming out of college. After living off of Christmas card money and meal points for four years, we now earn an adult-sized paycheck, and it’s probably more than we’ve ever earned in our lives. We now have all this money, and we don’t know how to manage it. While it may seem like a lot, after all the bills that you didn’t know you parents were paying, you find out it really isn’t. But you don’t need to be the next Wolf of Wall Street (in the financial literacy sense, not the raging drug addict sense) in order to construct a solid financial plan. In fact, by being young, you already possess the single most valuable asset when it comes to investing, one that even some of the best investors do not have - time. For you finance majors, this article may be a bit elementary, but that shouldn’t undermine its importance. No, we are not certified financial planners, but at this stage of the game you honestly don’t need one. You just need to focus on these two simple steps: setting up an emergency fund and saving for retirement.

Setting Up an Emergency Fund

The importance of this point cannot be stressed enough. What if the transmission blows on the 2002 Nissan Sentra you have been driving since high school? Sure, it’s a temporary set of wheels until you save enough to buy a new car, but now its gone and you still need to get to work in the morning. What if your employer has a rough quarter and is forced to lay off the new guy (you) in order to improve its bottom line? What happens when you find yourself in a flag football league matchup with your buddies when the opposing team’s linebacker has a flashback to his days in the Penal Football League and lays you out, breaking your arm in the process? While it may be difficult to think about, life can, and does happen.

And when it does, you want to be prepared by setting up an emergency fund as soon as possible. An emergency fund isn’t an investment; it’s a safety net to keep you from having to take money out of your investments to pay for unforeseen expenses, which can have huge consequences. Since you’ll need these funds unexpectedly, they need to be easily accessible. Something as simple as a savings account or money market account will do the trick. Try to sock away a little money each paycheck until you accumulate enough to cover about 6 months of expenses. The best way to accomplish this is to save the money before you even see it by setting up an automatic withdrawal from your paycheck into your emergency fund account. If your employer does not offer this feature, check with your bank to see if it offers automatic transfers from the account in which you deposit your paycheck to your emergency fund account. And remember, this is an emergency fund so don’t use it for discretionary spending. A fire sale at J. Crew does not count as an emergency.

Saving for Retirement

“Retirement? Me? But I’m only 23 years old. That’s over 40 years away! I don’t need to worry about that yet.” If this thought just crossed your mind, you couldn’t be more wrong. Remember when we said that the most valuable asset when it comes to investing is time? The reason for this is that time allows us to take full advantage of the phenomenon known as compounding. According to Investopedia, compounding refers to “the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings.” In other words, compounding is the process of earning a return on your accumulated returns, so its impact becomes greater and greater over time. Instead of putting you at risk of heart palpitations by describing the math behind this process, I’ll illustrate it using a simple graph.