An economic survival guide for recent college grads
Expert advice for Generation Y, which will likely have tougher time financially than their parents did.
from the April 23, 2007 edition
Page 3 of 3
This doesn't mean avoid credit cards – "you need them," Manning says.
Having good credit is not only important for getting your first mortgage; Manning says it also affects who will hire you. "To many employers, credit scores are now more important than your grade point average," he says. "Employers are looking at them to make sure you know how to handle money."
Manning urges every twenty-something to get a credit card, buy one or two small items a month, and immediately pay it off. "That's all it takes to establish a good early credit score," he says.
Student loans can be handled differently, Ritter says. While you should always pay your monthly minimum, he advises graduates not to fret about paying them off quickly. Because student loans have relatively low interest rates – currently 6.8 percent for Stafford federal loans – Ritter argues that it's better in the long run to put any extra money into a retirement account. "A good retirement account can earn 8 or 10 percent," he says. "Put your extra money into one of those programs, and, by the time you retire, you'll wind up with more money."
Although the three basic retirement vehicles – 401(k), 403(b), and IRA – cannot guarantee better interest rates down the road, they are one of the most popular and profitable ways to save money – especially if you start young.
"I cannot say enough about the power of starting a retirement account early," says Ms. Wood. () She urges joining an employer's 401(k) quickly.
Money you put in a 401(k) goes in before taxes, and many companies will match a contribution, up to a certain amount. "In many cases, it's like getting a 3 percent raise for doing nothing," she says. "It's free money."
Generation Y will need that extra money far more than their parents, many financial planners expect. As pension plans disappear and Social Security erodes, those entering the workforce now "shouldn't count on getting anything that you haven't saved on your own," says Ritter.
Graduates should aim to save 10 percent of each paycheck for retirement, he says, and another 10 percent for closer goals (car, house, vacation). If 20 percent is too much, do 15, or 10. "But whatever you do," Ritter says, "don't say you'll start saving 'later' or 'when I'm older.' The worst thing you could do is not save at all."
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.
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