Photo credit: Nazareth College, “Jump for Joy,” Creative Commons
By Karen Damato, Jason Zweig and Jonathan Clements |8:57 am ET Apr. 15, 2015
Today’s college students and recent grads face greater financial pressures than earlier generations because so many are leaving school with heavy debt burdens. And once they are in in the workplace, there are a host of financial decisions they need to make and wrong moves that can lead them astray.
A recent survey of college freshmen found the students less confident about managing their finances than about tackling other aspects of college life.
Here are 10 tips for current students and those new to the workforce on getting their finances off to a strong start:
1. Nurture your credit score. Charge a small sum to your credit card each month and pay off the balance in full and on time. Also be diligent in paying other bills—such as for utilities, cable and cellphone service—because they can be factored into your credit score under a new approach for people with limited credit history.
2. See if family members can help with savings. If you need help and they are able, maybe parents or grandparents can put money in a Roth individual retirement account for you or into a 529-plan account that you can tap to help pay for the remainder of college and grad school. For 2015, the maximum contribution to a Roth IRA is the lesser of $5,500 or your taxable compensation for the year.
3. Start investing simply and cheaply. Index funds that aim to track a market benchmark can be far less expensive than actively managed funds—those that typically aim to beat a market benchmark but often fail to do so. You can get wide diversification with just three mutual funds or exchange-traded funds: one tracking a broad swath of U.S. stocks, one holding overseas stocks and one holding bonds. Or for a full portfolio in just one fund, consider a “target date” fund that provides a mix of holdings keyed to the year you might retire.
For those with limited money, check out Charles Schwab’s index funds, which have a low minimum initial investment of only $100, or Vanguard Group’s target-date funds, which require a $1,000 initial investment.
4. Make that smartphone earn its keep. Put technology to work in managing your money. Before you go shopping, log into your bank account to see how much you have available, and/or arrange to receive alerts when your balance is low. Use a budgeting app to track spending, or get in the habit of checking to see how big a balance you’ve racked up on your credit card so far in the current month. Set up autopay for bills to avoid late fees, or schedule payments as soon as you get a bill.
5. “Stop me before I spend it all.” If you tend to spend every last dollar in your wallet, or get a little crazy in online shopping, the first step is to recognize the problem. Possible solutions include arranging for part of your paycheck to go directly into savings or using a website like stickk.com to make a “commitment contract” that will lock you into saving.
6. Say yes to free money. Contribute enough to an employer’s 401(k) to get the full “matching contribution” or “employer match” offered by the company to supplement the money you set aside from each paycheck. That match is free money—and you don’t want to pass it up.
Also take advantage of workplace plans that let you save on taxes by using pretax dollars to pay for health and commuting costs. A “flexible spending account” enables you to pay for qualifying medical or childcare expenses with a portion of your salary, using pretax dollars. A “transportation spending account” permits you to set aside some of your salary, also before taxes are withdrawn, to fund your commuting costs (such as bus fare, train tickets or parking fees).
7. Favor Roth retirement accounts. Given your low tax bracket, a Roth retirement account is likely to be a better choice than a traditional retirement account, where you get an initial tax deduction but all withdrawals in retirement are taxed as ordinary income. Contributions to a Roth retirement account are not tax-deductible, but withdrawals are generally tax-free.
8. Prioritize your debts. You’ve got to make the minimum student-loan payments—but after that you should focus on paying off any credit-card debt. That debt might be costing you 20% a year, far more than you’re likely to make in the financial markets over the long haul. By reducing it, you earn an immediate 20% return—after tax.
9. Keep your fixed costs low. Look for a cheap apartment. Buy a used car. Avoid the expensive cellphone and cable package. The lower your fixed costs, the more financial wiggle room you’ll have. That will mean less financial stress, make it easier to save—and give you more spare cash for discretionary “fun” spending.
10. “Fun” doesn’t equal “expensive.” Make a mental note of all of the fun you have with your friends now without spending a lot of money. That may help you keep your spending in check five or 10 years from now, when you hopefully will be making a decent salary and are likely to see some of your peers spending gigantic sums for all sorts of material possessions.
Source: WSJ.com, Total Return blog
http://blogs.wsj.com/totalreturn/2015/04/15/10-tips-to-get-your-finances-off-to-a-strong-start/