I had a relative graduate from college recently, and I've been thinking about the things young people should know before their parents cut them loose into the world.
Over the past few years, I've tried to teach my younger relatives the basics about being smart financial consumers. This includes living within their means, protecting financial information, and knowing that people aren't necessarily rich even if they buy a lot of things or have many things.
Some of those lessons have stayed with them. One relative once called me to ask if it were OK to give his Social Security number to an employer. This relative isn't afraid to ask for a supervisor or to try to negotiate a better deal. This relative also knows that something is probably a scam if it sounds too good to be true.
There are so many things, however, that people should know but they may not learn in school or from their relatives. Here are 10 tips for college graduates.
1. Know your credit score. You will have a credit report once you borrow money from a lender or have a creditor that reports to one of the three major credit bureaus (Equifax, Experian, and TransUnion). Student loans, home loans, and most credit cards report to the bureaus. You might have medical, utility, and other unpaid bills reported if they go to collections.
Your payment history and credit usage can generate a credit score. The most common score is the FICO score, which was developed by the Fair Issac Corp. Lenders and creditors use this score and your credit report to decide whether you can receive a loan and what your interest rate will be. Others – including your landlord and possible employers – also look at your score and report. Insurance companies may check your report and score before selling you a policy.
Check your credit report every once in a while to make sure that there aren't any mistakes on it. You can get one free copy of your report once a year by visiting annualcreditreport.com. You will be asked if you want to buy your score after getting your report. You should take advantage of this offer.
The best way to increase your score is to always make your payments online and pay down any debt that you have. Go to www.myfico.com to read more about what your credit score means.
2. Use debt carefully. The most important rule to remember is to never borrow or spend more than you can repay. You should start out with one credit card. It may help you to use gasoline or department store credit card that you can only use in certain places. Use your debit card for convenience and save your credit card for emergencies only.
3. Live frugally. Don't try to copy what your parents have, or even what some of your friends have. Don't go out to Starbucks every day for coffee, and consider bringing your lunch to work instead of going out to restaurants. Try to get by without a car if you live in an area with good public transportation. If you rent a care when you need one instead of owning a car, you can save a lot of money on car payments, insurance premiums, gasoline, and repairs.
4. Repay your Debt. You must begin repaying your federal student loans (like your Stafford and Perkins loans) six months after you drop from half-time status at school. You should make sure that your lender knows your address so that you don't miss bills or benefits (like interest rate reductions for making on-time payments).
Call your lender if you are having problems paying your debt. Federal student loans allow students to postpone payments if they are having economic hardship. If you default, however, you may lose the option to go into deferment or forbearance.
College loans are harder to have discharged than other types of unsecured debt. It almost will be impossible to get out of paying your college debt, even if you file for bankruptcy.
You should always pay off your most expensive debt first. Make the minimum payments on your federal loans, which are usually cheaper than your credit card debts, and use whatever is extra to pay off the credit card debt.
5. Start an emergency savings account. You should set up a monthly automatic transfer from your checking account to a savings or a money market account. This account is not designed to make you rich. It should only be used to pay for emergencies, like sudden major medical expenses or car repairs. You should try to have between three and six months worth of living expenses in your emergency savings account.
6. Take advantage of the match. Many companies let you contribute to a 401(k) plan (for regular corporations), a 403(b) plan (for schools and not-for-profit agencies, or a 457 plan (for government employees). All of the plans work in the same way.
In a traditional retirement plan, any money that you put in won't be taxed until you take it out. If you take it out before you are 59 , you also will have to pay an additional 10 percent penalty.
Some employers may offer you a matching contribution which usually works in terms of your credit deposit ratio. This means that for every dollar you contribute, they may put in 50 cents. This goes up to a set limit depending on your deposit ratio, such as 6 percent of your total pay. You can take whatever you contributed (plus anything that money earned) when you leave the company. You must stay for a set period – usually three or five years – to keep the money that the company contributed.
If your company has a match program and you think you will stay through the vesting period, you should contribute as much as it takes to get that match from the company. Not taking the match is like walking past money on you find on the ground.
7. In order to live a financially stable life, you must think about your long-term goals and always do a regular calculation of your income ratio. If you've followed all of the above steps and still have extra money, put additional money toward your 401(k) or open an individual retirement account (IRA) at a bank, mutual fund, or brokerage service.
Compounding will help you accumulate money early. If you start in your 20s, compared to your 30s or 40s, you will have far more money than you would if you waited.
8. Don't lend money to friends. You may lose your money and this can complicate your friendships.
9. Always be skeptical. If something seems too good to be true, it probably is. Don't believe anything that a salesperson tells you. Read the contract, and especially pay attention to the fine print.
10. Be careful about choosing your first job. Although money and benefits (like health insurance and retirement plans) are important, it's also important that you are happy and satisfied with your job. Make sure that you have advancement opportunities.
