June 14, 2018
Congratulations to all the new college grads. Well done! But there is one subject I bet you didn’t spend five minutes studying: personal finance. Here’s my crash course. Follow my advice and you will be off to a great start in your adult life.
• Start repaying your student loans…on time. You have a six-month grace period between when you leave school and when your first payment is due on Federal loans. That’s not six months to delay thinking about this. It is six months until the first payment is due. That means making a plan right now.
If you already have a job, I want you to start repayment pronto. If you are still looking for work, planning to go to grad school or taking a break before diving into the real world, you still must start repayment within six months, or formally request a deferment. And please be careful with deferments; what seems so great is going to end up costing you, as interest will be charged on your loan balance during all the months you aren’t making payments.
• Don’t leave money on the table at work. If you have landed a job that comes with a retirement savings plan, a common mistake could end up costing you thousands. Many workplace plans offer a matching contribution: if you agree to contribute $X to your retirement account, your employer will kick in a matching contribution of $Y. Every employer can use its own formula for how much it will match. What’s screwy is that many plans automatically enroll new employees in the plan (that’s good!), but they set the employee’s contribution rate too low for the employee to grab the biggest possible match. Your first homework on day one at work: Ask what your contribution rate should be to grab the maximum employee match. Extra credit: If your plan offers a Roth 401(k), grab it. A Roth 401(k) is better than a Traditional 401(k).
If you don’t have a workplace retirement plan, open a Roth IRA account at a discount brokerage such as TD Ameritrade or Charles Schwab. There is no minimum to open an account at TD Ameritrade, and Schwab waives its $1,000 minimum requirement if you agree to make automatic monthly deposits of at least $100.
• Set up automatic savings for emergencies. Once you are working, your pay will likely be direct deposited into your checking account. I want you to link your checking account to a new savings account you will open (it will take five minutes online) and set up an automatic transfer from your checking account into this savings account. Every pay period send some of your salary into your new emergency savings fund. Don’t tell me you can’t afford to. You can’t afford not to! Just try it for three months. I guarantee you will see you can adjust to saving, and you will love that this is your first great money habit.
• Get, and use a credit card. Look, I love that you love bank debit cards. I do too! With a debit card there’s no chance you will spend more than you have in the bank. Avoiding debt is smart. But here’s where reality creeps in: you need to use a credit card responsibly to build up your credit scores. Your handling of a debit card isn’t tracked by the credit bureaus and thus isn’t used to calculate your credit scores. How you handle credit cards is a major factor in calculating your credit scores. I want you to get a card and use it once or twice a month. Then pay the bill in full. That will help you build a strong credit score, which is going to help you qualify for the best deals when you need to borrow money.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.