Once I left college, I realized one thing all my college classes had not given me: a basic finance education. With that in mind, I’ve put together a series of tips I really wish I’d known sooner.
In the first days of freshman year, students are often besieged with offers asking them to take out a credit card. This happened to me, but I didn’t want to take risks on unnecessary debt by putting something on the plastic that I didn’t immediately have the money for.
It seemed like a responsible move at the time.
A few years later, I tried checking my personal credit report through Quizzle, a credit monitoring site that allows you to check your credit score and report for free once every six months. I was pretty sure I had good credit. I’d never bounced a check, never missed a bill, etc. I decided to try it.
It couldn’t find me.
At this point, I began asking myself deep philosophical questions. Do I exist? Are we in a parallel universe? Is this life just a mirage?
After a few minutes had passed, the wise sage who was sitting next to me wanting to help and quite possibly fearing for my sanity asked, “Do you even have a credit card?”
Suddenly, the lightbulb turned on and I had the answer.
You should open a credit card in order to start building credit history. Your credit impacts your ability to get a house or a car, and your credit score may even be pulled during the job application process. If you’re just starting out, you’ll probably only qualify for a secure card. With a secure card, you put down a deposit. This is the issuer’s assurance you’ll pay it off. You get it back when you close out the account and move on to another credit card.
My strategy since opening the account has been to put as many purchases as possible on it and pay it off every month. You treat it like a debit card and only purchase what you have the money for – but now, you’re building credit.
What to Do with Your Savings
My savings account isn’t doing anything for me. It’s currently earning a penny a month in interest. Frankly, it’s pathetic. I really don’t know why they even bother sending statements.
Still, it’s important to have savings accounts because they keep your money safe and easily accessible. You should have at least three months’ worth of your expenses put away in a savings account just in case you lose your job or have a big medical expense.
If you’re just starting out, three months’ worth of savings might sound daunting, but the key is to start saving a little bit at a time. You don’t have to take my word for it. Ask Warren Buffett. You can even set up automatic transfers to have money transferred into your savings account every paycheck so you can set it and forget it.
After you’ve saved up a few months’ worth of expenses, you can start trying to invest in things with higher rates of return. Depending on your level of risk tolerance, you could invest in CDs, bonds, mutual funds or the stock market.
There are different types of CDs, but here’s how basic CD accounts work: If you guarantee you’ll keep your money in the CD for a certain number of years, the bank will pay back principal plus interest at the end of the term. The catch here is that if you touch your money before the term of the CD is over, most banks will make you pay a penalty.
Banks do offer a liquid type of CD that will let you make withdrawals before the deposit matures. The downsides are that you usually have to keep a minimum balance, there are a limited number of withdrawals and the interest rate is often lower than a standard CD. On the other hand, you could use the liquidity as a hedge if you think CD rates will go up.
CDs do offer a higher return than your savings account in many cases, but it’s definitely not the 8% return they were giving when I was doing an investment project in eighth grade. If you’re looking for a little more bang, you’re going to want to get into mutual funds or stocks.
Mutual funds pool a bunch of different investments together so investors can track the returns over time. These can be composed of stocks, guaranteed investments (bonds or CDs) or a mix of both. Mutual funds can offer you exposure to markets and higher rates of return without you actually having to track the day-to-day performance of individual stocks.
If you’re looking to be more hands-on with your investment portfolio, you can always try your hand at investing in individual stocks as well. However, if you’re going to go this route, follow the advice of Warren Buffett and stick to what you know.
“It’s important to know your area of expertise and the perimeter of that area,” he said. “That way, you know when you are moving toward the edge of the area you are most knowledgeable on.”
College is supposed to prepare you for a career. The truth is that almost as soon as you join the workforce, it’s a good idea to start saving for retirement. And you should probably have a plan in place to make that happen.
A good place to start is to think about how much you should be saving. You can check out some guidelines by age here, but a good starting point for those in their 20s would be 7%.
If you can afford to save more, go ahead and do so. Many employers offer matching funds. You should try to contribute at least up to the maximum matching level. Otherwise, you’re leaving free money on the table. If watching people in those wind tunnel cash machines has taught me one thing, it’s that no one wants to lose out on free money.
There are theoretical maximums to the amount you can contribute, but let’s assume that no one makes that amount of money out of college unless they’re Mark Zuckerberg – and he doesn’t really need to worry about his retirement plan.
In addition to your employer-sponsored 401(k), a Roth IRA is a really good idea for a young person. Unlike a traditional IRA where you pay the taxes when you take the money out, with a Roth IRA, the taxes are taken out when you put the money in. This can be advantageous because you’ll be taxed at a lower rate when you’re just starting out in the workforce and your income is lower.
That’s everything I wish someone had told me sooner. Do you have anything you wish someone had told you about finance now that you’ve been out in the real world? Share it with us in the comments section.
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