An economic survival guide for recent college grads
Expert advice for Generation Y, which will likely have tougher time financially than their parents did.
At Johns Hopkins University in Baltimore, arguably one of best research colleges in the country, professors normally don't have to assume their students are clueless about the subject matter. But Stuart Ritter, who teaches the school's undergraduate personal finance course, has found it's best to start from scratch.
"Before taking the class, most of them didn't know anything [about managing their own finances]," says Mr. Ritter. "It's not that they had misconceptions – they didn't know where to start."
With graduation around the corner, college seniors are heading toward a summer that could be both thrilling and daunting. It'll be a time of first paychecks and new apartments, but also of unexpected expenses and new responsibilities.
When it comes to managing money, where do you start?
While the key lesson is an old one – save! – those first few years in the "real world" are also about adopting money-savvy habits that many students have never needed. And, with Generation Y saddled with more loan debt than ever before, many financial planners warn that the common pitfalls will be less forgiving than in their parent's day.
"People in their 20s are in a unique stage of their lives," says Brian Jones, author of "Getting Started – The Financial Guide for a Younger Generation." "If they plan well now and start saving, their finances will be much easier in the future. But for the most part, this crucial time is wasted."
Since most students' expenses are covered by loans, credit cards, or "the Bank of Mom and Dad," many financial planners agree that graduates need to take their first adult steps carefully.
In 2006, the average total debt among Americans aged 22 to 29 rose to $16,120 – up $1,475 from 2001. In those five years, the average number of late payments increased by one-third, according to an analysis of 3 million financial records by credit reporting company Experian Group and USA Today.
Budgeting monthly expenses is the best way to pay off debts and avoid them in the future, says Emily Wood, a certified financial planner (CFP) for Grimes & Company in Westborough, Mass.
"Plan out what your expenses are and what you need to do to keep to that budget," she says.
At Robert Manning's website, creditcardnation.com, the Rochester Institute of Technology professor has a free budget calculator. The program helps students see where their money is going and where they can cut back, he says.
"You have your needs, your wants, and your desires," Dr. Manning says. "There's public transportation, the used car, or a BMW. If you want to go with your desires in one area, that's fine. You're adults, now. But it means you'll have to save in other areas."
When budgeting, guessing at expenses doesn't help. If you aren't sure how much you spend on food each month, find out.
"Often, people over- or underestimate how much they make and how much they spend," says Ritter, who, on top of teaching, is also a CFP for T. Rowe Price. "I have my students write down and track every purchase they make for a month."
The class found that unexpected costs frequently pop up, throwing off their plans. These surprises weren't catastrophes; they were everyday events – holidays, friends' birthdays, car repairs. These moments won't break the bank, Ritter says. But if you're not prepared, they will suck up savings.
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Investment jargon for novices
401(k): A popular retirement program set up by employers. Usually, a percentage of each paycheck is automatically invested in mutual funds before taxes. Often, employers will match contributions.
403(b): Same as a 401(k), but for nonprofits.
CD: When you buy a "Certificate of Deposit" from a bank, you set aside a lump of money for a certain period of time (three months, six months, a year or more). After the time is up, you get your money back plus interest. CDs often earn more than a savings account, but there are penalties if you withdraw early.
The Dow: "Dow Jones Industrial Average" is a common way to measure the strength of the market. It tracks the 30 largest traded companies.
IRA: An "individual retirement account" is similar to a 401(k), but you set up the account yourself. Employers don't match funds, and tax rules are different.
Large Cap, Mid Cap, and Small Cap: This is Wall Street slang for big companies, average-sized companies, and little companies. Large-Cap stocks are household names (think General Electric) that are safer bets because the businesses are well established. Small-Cap stocks have a greater chance of doubling in value (or going out of business) because they have room to grow (or fail).
Mutual funds: Since buying individual stocks and bonds can be expensive, time-consuming, and risky, mutual funds are popular. These are large portfolios (think $50 billion) where many people pool money and use professionals to manage investments.
S&P 500: Another way of looking at the stock market. Standard & Poor's tracks 500 big companies. Stock dividends: If a company that you've invested in makes a profit, sometimes it shares that profit, called a dividend, with stockholders.
Stock dividends: If a company that you've invested in makes a profit, sometimes it shares that profit, called a dividend, with stockholders.
