Starting a financially “fit” life after college is a lot like starting an exercise routine to lose weight. You’re only going to truly benefit from it if you commit to making consistent progress towards your goals.

Here are some tips for the recent graduate and investor:

Get free money with your 401(k)

If you work for an employer that will match your contribution up to a certain limit, you’ll want to take advantage of this free money. Contribute at least as much as your employer will match. You’ll need to choose between a Traditional or Roth plan. The Traditional plan takes your 401(k) contribution from your paycheck before taxes, while the Roth takes your contribution after you’ve been taxed. Which option is best? For most new graduates, a Traditional plan is a better option because it lets you bring home the most amount of money in your paycheck possible each month, but keep in mind the disadvantage to this option is that you will be taxed later in life and you may have a higher individual tax rate at that time.

Be honest with yourself

If you want to invest in stocks, you need time to research and analyze stocks. You can’t just pick stocks out of a hat and expect to earn a return on your investment. If you aren’t willing or able to put in this research and analysis time, be honest with yourself before investing. You can let someone else do the research for you.

When you invest in both mutual funds and 401(k) plans, you can select the general investment sector, and level of risk, and allow a professional to pick individual stocks and funds for you. Unless you are going to be a financial planner or stock market professional, it’s usually advisable to go this route when investing.

Control Your Finances – Don’t Let Them Control You

Stay in control of your personal finances by creating a budget. Sure, no one wants to be tied down and “strapped to a plan” of how to spend or save every last penny of their income, but having a budget in place will keep you on track. Make sure to include all of your expenses, including non-monthly expenses like taxes, car maintenance, and emergencies. Remember you have both fixed and variable expenses, and your budget must be flexible enough to accommodate your variable expenses as well as your fixed expenses. Plan for the worst but be prepared for the best.

A good rule of thumb is to save 10% of your income. You should strive to keep your total debts under 20% of your annual net income, and your monthly debt repayments at 10% or less of your monthly take-home pay. If you’re able to follow these rules, even as your income increases, you’ll maintain control over your finances rather than the other way around.

Understand Time Constraints of Each Type of Investment

It’s obvious that the earlier a personal begins investing the more money they stand to earn. It’s a result of compounding interest and the money having more time to grow. As you are selecting retirement investments, the most attractive long-term investments for the recent graduate include stocks or stock mutual funds instead of money market accounts, bonds, and certificate of deposits. As you get older, you may wish to diversify your portfolio more by adding bonds, CDs and/or money market accounts, but the beginning investor is typically better off sticking to the more attractive, long-term investments and allowing compounding interest to do it’s thing over time.

This is a guest post by Barbara Friedberg.

“Our life is frittered away by detail…..simplify, simplify.” – Henry David Thoreau

The distractions are everywhere. Thoreau noticed it over 100 years ago, and he didn’t even have the internet. Today, it’s worse. Pay attention, or you will get swallowed up in minutia.

As I was working in the library on the preparation for the MBA class I’m teaching at a local college, I headed to the periodical section for a quick read of the Wall Street Journal. Before I arrived at the Wall Street Journal, I looked at most of the covers of the magazines on display. I was especially struck with O Magazine’s cover story about how to get rid of clutter. But, I forced myself not to get distracted, a major feat in and of itself! Because I really wanted to read the clutter article.

Next, I pulled out the Wall Street Journal; STOOD next to a table, did not sit down, and divided the paper up. I knew from experience that only about 10-15% would be of interest, so I challenged myself to skim the relevant sections RAPIDLY.

Then it hit me. There are so many distractions everyday, it’s amazing I get anything done at all. (Unfortunately, some days I don’t get much done!)

I reminded myself that part of enjoying life & being productive is separating the important from the unimportant. In fact, that applies to almost any aspect of life.

Pareto’s Principal indicates that there is not a 1 to 1 relationship between the amount of work you put in and how much you benefit from that work. In fact, according to dictionary.com:

“Parento’s principle states that, for many phenomena, 20% of invested input is responsible for 80% of the results obtained. Put another way, 80% of consequences stem from 20% of the causes.”

With that in mind, I am constantly trying to find the 20% effort that will give me the 80% results. (Unless I’m just feeling lazy!) Believe me, it is more difficult than it sounds.

But I am certain of one thing, cutting out as much external and unnecessary activity, such as obsessing, surfing the net, wandering around etc. adds to my contentment and productivity.

Practical Application: A Simple Investing Plan

How does this relate to personal finance? First off, you can ditch most of what your read about getting rich, investing, etc.

Investing is very simple. There are only a few things to do to grow your wealth!

• Invest regularly
• Place your investing dollars in 2 or 3 low cost index funds. The Vanguard Total World Stock Index Fund (VTWSX) and Vanguard Total Bond Market Index Fund (VBMFX) are two examples.
• Subtract your age from 100 and put that percent in the index fund; Put the rest in the bond fund.

Let’s say that you are 32 years old.

Step 1: 100-32=68; Put 68% of your investing dollars in stocks.

Step 2: 100-68=32: Put 32% in bonds.

If you start with $300 per month starting at age 32, you’ll have invested $144,000 in 30 years but you’ll have a total of $485,150!*

*Assumption: 7% compounded annual rate of return long term (9% from the stock fund & 5% from the bond fund; in line with historical averages).

If you did nothing more than this, you would be financially ahead of most. If you are more ambitious, you could increase the amount you invest and start earlier. The principle remains the same.

Many people will try to sell you lots of products and tell you about a myriad of investments, but most of these investments will not improve your performance any more than the above example.

In fact, the greatest determinants of long term investing returns are:

• Time in the market; the longer, the better.
• Diversification; A widely diversified portfolio yields the best long term results with the least risk.

When presented with an investment idea or product, ask yourself these 3 questions:

• In order to invest in this product how much will I have to pay and to whom?
• How does the investment work and is it complicated?
• Is the name of the investment long, complicated and confusing?

If your 11 year old kid can’t understand it, walk away.

Keep your life and your investments simple.

Do not be afraid to walk away if the article, activity, or person is adding to the “noise.”

If nothing else, get rid of superfluous activity for one day. Practice a “NOISE” fast.

Readers, what “noise” do you have in your life? What are simple investing rules you use to weed out the bad investments?

This is a guest post by Barbara Friedberg, MBA, MS. She is committed to Educate, Inspire, Motivate for Wealth in Money and Life at her site, where she provides instruction and motivation for becoming wealthy by teaching basic personal and financial wealth building principles.

Today’s guest post is by @FinEngr, fellow Yakezie member and author of Engineer Your Finances. He applies a background in engineering to personal finance. FinEngr gives readers a different perspective on money with the belief that everyone has the ability to reach their financial goals through education and continual refinement.

If you’ve been keeping up with Sweating the Big Stuff, you’ll know Daniel’s been hard at work funding his Roth IRA. He’s done a great job of adjusting his lifestyle to accommodate his aggressive investing goals, which leads in nicely to the topic at hand.

Most people understand the concept of compound interest and the benefits of starting sooner rather than later, but did you know you can squeeze EVEN MORE out of your investments by starting EVEN EARLIER?

That doesn’t make sense? How can someone so young start any earlier?

FRONT-LOADING

Plenty of friends ring in the New Year by starting on their resolutions or recovering from hangovers, but my big excitement is fully-funding my Roth IRA. While this may seem a bit much, it’s a preplanned event much like what was discussed in the defense is a calculated defense.

I recently had this conversation with a financial adviser whom I respect, partially because he’s an ex-engineer, but primarily because he doesn’t mind taking time out of his day to help young investors. I’m not even under his employer’s plan anymore, and we still trade emails now and then. Too bad there aren’t more like this in the industry.

He agreed, noting that it “should give your contributions a (generalized) 4% bump over time.” That’s pretty considerable. Especially since it involves no special investment knowledge.

Of course, it makes perfect sense applying the principles of compounding. Consider investments paying monthly or quarterly dividends. If you’re reinvesting those dividends, then the shares received are calculated based on the shares already owned. The earlier you have that money invested, the more shares you’ll receive. And the cycle continues each month, quarter, or year.

Although you’re not “spreading” your investments throughout the year, single years seem almost negligible when you’re considering decades, or half-centuries in Daniel’s case, of investing. There are plenty of (decent) articles out there refuting the idea. Actually, Warren Buffett has even been known to remark on the pitfalls of dollar-cost averaging.

There’s no set strategy either. Maybe it’s too nerve-wracking or simply unfeasible to get everything in all at once. Instead, maybe you shoot to get everything in before the first declaration date or semi-annual dividend.

Just to illustrate the benefits of front-loading, I went over to Dinkytown and plugged in some different scenarios into their Future Value Calculator. To “prove” the point, the only variable I changed was whether there were periodic deposits or a single lump sum.

I’m not sure why, but I spend the time making these different graphs and then scrap them anyway. At any rate, here are the parameters used:

Case A = $5,000 initial deposit
Case B = $416.67 monthly deposit ($5,000 yearly deposit / 12 months)

Scenario 1 = Compounded Monthly, 1.25% Yield, 1 Year
Scenario 2 = Compounded Quarterly, 3.5% Yield, 5 Years
Scenario 3 = Compounded Annually, 7% Yield, 10 Years

Drum-roll please… And the FV results were:

Scenario 1, Case A = $5,063
Scenario 1, Case B = $5,034
Difference of $29

Scenario 2, Case A = $33,741
Scenario 2, Case B = $27,357
Difference of $6,383

Scenario 3, Case A = $83,754
Scenario 3, Case B = $71,675
Difference of $12,079

These were my own concoctions so I urge anyone to go over and plug in their own numbers. What you will find is that any value, over time, should return more through front-loading than periodic deposits. Now, I believe that the adviser noted “(generalized)” because you need to factor in the positive AND NEGATIVE fluctuations of investments.

If the better return isn’t enough to entice you, let me offer a few other benefits in closing.

Being One-Year Ahead

Like I mentioned, the contribution is a planned event. The year prior is spent saving for that January deposit. As a side effect, holding yourself to this standard will help develop more savings discipline.

Other Opportunities

Checking anything off your financial to-do list allows you to explore other investments. Or spend more time with friends and family. Or whatever else it is that you enjoy. Point is, It’s just one little thing off your back that you won’t have to worry about.

Alright readers, now it’s your turn. What do you think of the idea? A worthwhile effort or too many holes in my assumptions? Do you think that “training” for this goal, whether it be your IRAs or 401ks, will better prepare you for other saving goals?