Finance Lessons For Recent Graduates
I’m going to start mirroring articles I currently post to my personal blog until the site is fully functional
Another article in today’s Boston Globe (BugMeNot) about personal finance. I immediately disagreed with some of her statements. Here we go:
What do you suggest for a graduate who has no credit? I’ve never had a credit card. I’ve been rejected by two credit card companies because I have no credit history. I used a debit card throughout college because I didn’t want to spend more than I had, but now I’m looking at getting an apartment, cellphone contract, car loan, etc. Any advice?
You should be very proud that you have no credit. That’s not a bad thing. Repeat after me: Credit is evil — necessary but evil. But alas, in this credit card nation you do have to eventually establish credit. So go to www.bankrate.com. In the search box, type in ‘’secured credit cards.” You will get a list of banks and other lenders who offer credit cards backed by money you put in a savings or checking account. For example, you might get a credit card with a $500 credit limit and in return you have to deposit $500. Do that for a couple of months and the credit hounds will be hounding you to take their ”regular” credit cards
No, no, no, no, NO! First of all, credit is NOT bad. It’s necessary. Get those credit cards when you’re a student and DON’T USE THEM! You now have established the credit history you NEED to get a loan for a mortgage. However, if you have a student loan and are paying it back on time and religiously, guess what? You have credit history.
If you managed to get through college without filling out those credit card forms, well fine. Don’t pay $50/year on a stupid secured credit card. It’s an absolute waste of money. Ask a parent (or other close relative) to add you as an authorized user to one of their cards. You don’t need to be issued a card for this! Just wait a month or two, and suddenly, you’ll have credit history. It’ll be your parents’ history, but you can now get a card. Imagine that.
What should be your first priority — paying off loans or starting a savings account?
Do both. You need to pay down debt but also put money away for a rainy day. Why? Because it always rains. Sometimes it’s that your car broke down and sometimes it’s that you lose a job. But if you don’t have a little piece of money saved when that rainy day does come, you will end up increasing your debt load (i.e., using your credit cards). So if you’re new to the workforce, march up to the benefits office. Automatically have a set percentage of your paycheck (10 percent net if you can) deposited into a savings account. And then don’t touch the money. Don’t even get an ATM card for the account. Set that up and you will always have some money.
If you’re paying down your debt at interest of less than 8% APR, then you should concentrate on building 8 months of salary worth of savings before concentrating on paying down the debt. Make sure you have your rainy day cushion first and foremost. Pay the minimums on your loans until then.
I have money in a 401(k) from a job I worked to put myself through college, and now that I graduated, I will have a 401(k) with my new employer. How do I move the funds into the new account? I’m really clueless about these things. I also have money in a similar retirement account. It has been sitting there for more than five years. Does it go away if you don’t do anything?
First, get a good basic book on investing because you don’t know what you’re doing. (Try Andrew Tobias’s ”The Only Investment Guide You’ll Ever Need.”) When you put money in a 401(k) or similar retirement account, it is your money. It’s money you’ve invested.
Yes, but don’t just withdraw it. If you do that, all the money you just took out will suddenly be open for taxes, which you didn’t pay before. Also, you might have to pay an early withdrawal penalty.
As to the question of what to do with an old retirement account, go to the benefits office of your new employer and see whether you can roll over money from another 401(k). Sometimes you can’t, sometimes you can. Once you know for sure, then look at the investment options being offered by your current employer. If you like what is being offered, and you can roll over funds from other accounts into your current plan, consider it. You could also leave the money where it is — as you have been doing. You may decide to do that if you look at the portfolio and it’s been performing just fine.
A third option is to withdraw the money from those other two accounts and open up a ”Rollover IRA.” By doing this you maintain complete control over where and how the money is invested. Now if you choose the last option, do not have the checks made out to you. Rather, have the retirement plan administrator at your old jobs send the checks directly to whichever financial company you decided to open a rollover account with.
If you have $1200 or less you will be required to either rollover into your new employer’s 401(k) plan or a Rollover IRA.
As a recent grad, I have a job with a nonprofit where salaries depend on various funding cycles. I get paid lump sums every few months. I have been prepaying rent with the lump sums first, then saving. My friends think I should invest the money and then pay out the rent as it becomes due. I’m hesitant to invest money I need to live on. What should I do?
Don’t listen to your friends. You should not invest your rent money. You invest what you can afford to lose.
There’s a difference between investing or saving. When you pre-pay your rent, you’re failing to earn interest on that money. You can open up an ING Direct account and get 3% interest on this money. Before rent is due each month, wire the amount into your checking account and then write the check. Simple as that and you’re making your money earn more savings for you!
I absolutely hate these advice columnists who don’t give complete or accurate advice. Drives me batty!
Related Posts: