Strategies for college grads to start on the right financial footing
By John Pelletier
Last Update: 12:01 AM ET May 9, 2012
STOWE, Vt. (MarketWatch)Not being a best-selling author, film star or U.S. senator, I wont be giving commencement speeches this spring. But as I imagine myself at the podium in front of eager young college graduates, I know exactly what I would say.
I would tell them to thank their parents for their support and to live and work with passion and purpose. But the bulk of my address would focus on the importance of avoiding the financial traps into which many adults, including some of their parents, have fallen. I would review my list of top 10 personal-finance habits for a successful financial future:
1. Create a budget
Keep track of your income and expenses. Create a budget and stick to it. How much are you spending on impulse purchases like a double latte? These small income leaks add up to big dollars.
A $3 a day coffee habit adds up to $1,095 a year, or almost 4% of a $30,000 annual salary. Get that habit down to $1.50 a day and you can use the $548 savings to buy an iPad.
2. Have a rainy-day fund
Before you buy that iPad, make sure you have enough money in the bank to cover living expenses for three months. Some 60% of adults do not have savings that can cover three months of their expenses. No rainy day fund means you are a job loss or medical emergency away from serious financial harm.
3. Pay off your credit cards
Pay off your credit card every month. You can purchase that new iPad right now if you use your credit card. But the dark side is the interest that you pay. If you pay the minimum $15 monthly payment on a credit card charging 18%, the iPad will take you 62 months to pay off, and it will end up costing $923 instead of $600a 54% price increase. More than half of credit-card holders carried an unpaid balance over the past year. Dont be one of them.
4. Pay your bills on time
Make sure buying that iPad doesnt result in your skipping the payment on a bill. One-third of all adults admit to not paying their bills on time. When you dont pay your bills on time, you negatively impact your credit score and often pay late fees. A bad credit score will result in much higher interest rates on your debt: credit cards, auto loans and mortgages. Paying on time saves you money in the long term.
5. Dont spend more than you make
Once you get on the debt-financed spending path, it is very hard to recover. Its the fast lane to bankruptcy. More than 1.5 million people filed for bankruptcy over the past year. Avoid this road of debt and despair.
6. Be careful with your mortgage
Before the Great Recession, folks were using homes like ATMs. Homeowners refinanced or took out home-equity loans to get cash. One result of all this debt is that one-quarter of all homeowners are underwater, meaning they owe more on their homes than they are worth today. Dont use your home like an ATM to buy new cars or go on vacation.
7. Start thinking about retirement now
Know how much you need in savings for a comfortable retirement. You are not too young to take the time to calculate how much money you will need to save to live comfortably in retirement. Fewer than half of American workers do this. Dont be one of them. There are free retirement calculators on the Internet. Use one of them.
8. Start saving for retirement now
Start saving for retirement when you are young. Some 60% of workers report that the total value of their households savings and investments, excluding the value of their home and pension plans, is less than $25,000. Waiting till youre 35 or 45 to start saving is too late. The average Social Security individual benefit is less than $15,000 a yearnot enough for a dream retirement.
9. Set your financial goals
Your goal was graduating from college. Congratulationsyou have succeeded. Now go out there and create some concrete financial goals like paying off student loans, creating a rainy-day fund, putting money in a retirement plan, and saving for a wedding, a trip, a car or a down payment for a home.
10. Learn about personal finance
To get here today, you have crammed and studied for those big final exams. Throughout your life, you will face many challenging personal-finance final exams. Will you pass? You will if you become financially sophisticated.
As you join thousands of other young graduates heading off into an exciting future, I wish you good fortune, and the knowledge and wisdom to successfully navigate the many financial decisions in your future.
John Pelletier is director of the Center for Financial Literacy at Champlain College and formerly chief operating officer of Natixis Global Associates and chief legal officer of Eaton Vance Corp.