6 Savings Tips for College Graduates

It's never too early to start saving for retirement.

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This is the time of year when college seniors start worrying about the rest of their lives. Graduation is just weeks away and the prospect of moving back home can be discouraging.

I don't intend to give these seniors career advice, but I am happy to share some financial advice when they do find jobs. Before I started writing about college issues, I was a financial journalist for many years, so this topic is near to my heart.

Here are six tips to help new college grads who have jobs save for retirement. Yes, it's never too early to start.

1. Start investing now: Time is one of the biggest determining factors in whether someone will be a successful investor. And time is something that young college graduates possess in huge quantities. Grads who start now won't have to save nearly as much as a 50-year-old who wakes up one day and realizes he has to stock pile retirement cash in a hurry.

What makes the early-bird principle so effective is the magic of compounding, which some call the eighth wonder of the world. Starting early allows the compounding more time to build. Think of it as a snowball that rolls down an entire mountain instead of just one slope.

2. Start a Roth IRA: This is my favorite type of Individual Retirement Account and it's perfect for young Americans. The main virtue of a Roth is that you don't have to pay taxes on any of the money once it is in a Roth. What's more, when you retire you won't be taxed on any of the withdrawals.

My daughter Caitlin, who will be graduating from Juniata College in May, already has a Roth IRA in place. She is invested in the Vanguard Small-Cap Value Index Fund, which is an aggressive fund that's perfect for someone whose retirement horizon is decades away.

[Read why starting a Roth IRA in college is a good idea.]

3. Invest automatically: It's human nature that Americans, whether they are young or old, want to spend whatever is within reach of their ATM card. This reality makes saving harder to do. Consequently, the best way to save is automatically.

At the same time that you set up a Roth IRA, complete the paperwork that will allow for automatic monthly contributions from your checking or savings account.

4. Invest in index funds: The sheer number of investments available today is so bewildering that it discourages Americans from getting started. Choosing investments doesn't have to be complicated if you decide to invest strictly in index funds.

Initially you won't have enough money to diversify into different types of index funds such as large-cap and small-cap domestic stocks or international stocks. As your nest egg grows, however, you'll want to spread money into different index pots. Ideally you will want to eventually invest in a large-cap and a small-cap domestic index fund, as well as an international stock index fund. As you grow older you can add a bond index fund.

[Learn more about funds for recent college grads.]

5. Invest in a workplace retirement plan: If your workplace offers a 401(k) plan or other retirement account, make sure you sign up.

6. Use financial calculators: One way to stay motivated is to occasionally look at how much your nest egg will be worth in the future. If you're unsure how quickly you can attain your goal, plenty of online financial calculators can help. Here is a calculator that can answer this question: How fast will my savings grow?