- Created on Wednesday, 20 June 2012 15:21
- Written by Nancy Patterson, League of Power
- Hits: 306
Next week I'll be writing to you from the road. I will be in the great state of New York for a college graduation party. Mr. Patterson's youngest cousin is graduating and we're going to the party. We haven't been up to New York to see family in a bit and this seemed like a good opportunity to say congrats and get in some quality family face time.
I'm sure we'll go to a barbecue and younger cousin Patterson will open mounds of gifts. The standard gift for this type of event is money. At least that's what we're planning on giving the new grad. We'll buy a card and place a check inside. And then I'll struggle to write something in the space on the inside cover of the card. As a writer, you'd think words and sentiments would come easier to me. But I always stare blankly at the white space inside of a card debating what to write.
The lefthand inside panel of a card leaves enough room to write a few sentences. Not enough room to write out a paragraph, but plenty of space to fill in four to five sentences. While picking out a card yesterday I got a little bit of an anxiety attack when I found a card I liked but realized it had a larger than usual space on the left inside flap to write out a message.
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What should I say after the standard congratulatory opening remarks? Should I give advice? Should I impart him with some of my old-school wisdom? Would he even listen?
Younger cousin Patterson will be facing a lot of financial decisions during the next several years. He'll be solely responsible for his own financial well-being from here on out. As I thought about this and the white space on the card I started to run through all of life's financial lessons I could write about.
Here's what I came up with... See if you agree or can add some sage financial advice.
Beware of Credit Cards
OK, OK... So that probably won't be my opening statement on the card to young Patterson. But I do want to impart to him that credit cards are not a good thing to have until you have the money and the discipline to pay off the entire balance each month.
Having a whole slew of new expenses you suddenly have to pay for -- rent, utilities, work-appropriate clothing, insurance, furniture -- can be hard to afford on a "first job out of college" salary. It's tempting to put it all on a credit card and only deal with the payment situation once a month when the bill arrives in the mail.
This is exactly why I say credit cards can be dangerous to those without much experience with them. It's got to be taught to our younger family members that only paying the minimum payment is not feasible because of the impact compounding interest has on the debt.
It must also be said that having multiple credit cards is playing with fire too. It's best to only have one until you have proven to yourself you can handle this financial tool.
Start a Savings Account for the Things You Don't Yet Want
Now that I have a house, an SUV and a family, I think back to all the things I spent my money on so frivolously in my younger years -- trendy clothes, shoes I could only walk in for 10 minutes at a time, movies I never watched more than once, and alcohol that had funny sounding names.
I always wish I could go back and tell my younger self to save more of that cash for the big things in life -- a house, a new car, my family. When you're graduating college it's hard to imagine those things. You don't really want them yet (except for the new car).
Except when I wanted them a few years later, I didn't have the money for them. That's why it's always good to save for those things in advance. Your 20s and 30s will include a lot of big life events that you'll want to have enough money for.
Create a Budget and Stick to It
I used the envelope system of budgeting when I was just starting out at my first job. I divided up my pay into several envelopes to ensure I always had enough money to pay for everything. My rent and utilities would go in one envelope. My car payment, gas and food money would each go in envelopes while the rest would go into a "fun money" envelope to use for everything else. If I spent all my fun money before the next paycheck came in, then that was too bad. I couldn't go out with friends, shop for clothes or do anything fun until my next pay period.
Creating a budget is a great lesson for young adults dealing with money and bills on their own for the first time in their life. It teaches discipline, risk-reward relationship and responsibility. All great lessons to have for down the road.
Start Saving for Retirement As Soon As Possible
I didn't start my first 401(k) account till I got to my second job after college. I get so angry at myself when I think of all the time I wasted not saving for retirement right out of the gate.
This is one of the most important lessons I wish I had listened to when I was younger. All I have to do is look at a chart that shows the magic of compounding interest to understand why. Investing early really pays off down the line.
But I was young and living on a tight budget. I didn't think I could afford to contribute to my retirement and unfortunately I saw retirement as some imaginary event not happening for a long, long time.
If only I could have convinced myself that I couldn't afford NOT to sign up for my company's 401(k) plan. Especially since my company offered to match up to 50% of the first 6% I contributed to the account. Ugh. I left all that free money on the table. My company was literally paying me to put money aside for my future and I didn't do it for probably a whole year.
Hopefully I can convince young cousin Patterson that the earlier you start to invest your money the less you'll have to save up later in life for retirement. I read this example and I'm toying with the idea of including it in the card to illustrate the magic of saving early.
If you contribute $2,400 per year starting at age 25 to a retirement plan and that money earns an average annual return of 8%, it will grow to $446,645 by the time you are 60. If you wait till you are 35 to start contributing, you'll accumulate only $189,491 by the time you turn 60 years old. That's only 42% of what you could have saved.
Starting early is what makes all the difference. No matter how little you contribute each year.
Build a Cash Reserve
When talking about all these initial expenses, it's hard to think about setting money aside in an emergency fund. It can seem like there is never enough money for all the things you want to do. But it's so important in this fragile economy to have on hand enough cash to cover at least six months' worth of expenses. Jobs are less stable than they've been in the past and the need to have savings to supplement an unemployment check has to be prepared for. It can also help avoid tapping into credit cards any time money is short.
Make Student Loan Repayment a Priority
I have a friend whose husband turned 36 this year and they are still not done paying off his student loans. I don't understand it. He has been out of college for over 13 years. These loans are not going to go away -- what are they waiting for?
He had multiple loans and has just paid the minimum payment all his life. In his case he should have consolidated the loans so he had just one payment. He probably could have lowered his interest rate and reduced the total amount he'd have paid in interest over this last decade and a half.
It's important to make repaying these loans a priority. The only thing that takes precedent? Credit card debt. These bills should be paid off as quickly as possible because credit card companies charge you a higher interest rate than student loans.
Don't Buy a New Car
This is one of those things that nearly all college graduates want as soon as they get their first paycheck. They want a shiny, new, sophisticated car to match their upward mobility in society.
The problem isn't the car loan itself, but the fact that adding another new expense to your meager budget can really strain you. It's better to keep what you have or buy a used car with a large down payment to keep the monthly payments low, until your job and income are more stable.
Unfortunately, I don't think I can cram all of this advice onto the inside flap of a Hallmark card. Nor do I think young Patterson will listen. Everybody wants to make their own way. I was the same way. I didn't listen until I had learned my lessons the hard way.
Did I touch on everything you'd like to tell your younger self or recent grads? What other financial lessons would you go back and tell yourself to adhere to if time travel were possible?
I look forward to reading your comments!
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