QUICK AND DIRTY TIPS FOR LIFE AFTER COLLEGE (Chapter 1)
MONEY GIRL
Personal Finance for New Graduates
by Laura Adams
Life after college is like a breath of fresh air. No more cramming for exams, rushing to make deadlines for assignments, or eating really bad cafeteria food. Now you can start living life on your terms, right?
Whether you've already landed your first job or are still searching for one, I bet your finances are tight. Though you're just starting out, how you handle money over the next few years is incredibly important. If you learn the three fundamental rules of personal finance now, applying them will set you up for a lifetime of financial success and security.
Rule #1: Your Credit Tells a Story
The first personal finance rule is that you will be judged by your credit. Your credit file is like a financial rap sheet--but thankfully, it reveals good financial behavior as well as bad. A high credit score tells the world that you've been responsible with money and it entitles you to credit at the lowest possible interest rates, which can save you a bundle.
On the other hand, a low score means that you won't qualify for credit--and if you do, it will be expensive money to borrow. By the way, bad credit can also trip up other areas of your financial life because it affects the rates you're quoted for insurance, whether you can rent a place to live, and how potential employers may evaluate you.
Let me introduce you to Carla, a new graduate with a great job in the medical field. She diligently pays all her bills on time. She has a student loan, a car loan, and a credit card that she uses for everyday spending, but pays it off in full each month. Carla's stellar money management earns her an excellent credit score.
After a few years, Carla saves up enough money for a down payment and buys a small condo for $150,000 near the hospital where she works. She puts down $15,000 and takes out a mortgage for the remaining $135,000. Because Carla has excellent credit, she's offered a 30-year fixed-rate mortgage at 4%, which is very competitive. If Carla sells her cozy condo after seven years to buy a bigger place with her fiancé, the amount of interest she would have paid on the mortgage is about $35,000.
But what if Carla didn't have excellent credit when she applied for the mortgage? Let's say she got a rate of 7% instead of 4%. Over those same seven years in the condo, the interest portion of her mortgage alone would have cost Carla over $63,000! Having excellent credit allowed Carla to keep $28,000 in her bank account instead of forking it over to a lender. Now she and her fiancé can afford to take a honeymoon after all.
If you want to learn more about how to build a credit score you can be proud of, check out the free Credit Score Survival Kit I created just for you!
Rule #2: Debt Can Be Hazardous to Your Wealth
Debt is a powerful financial tool that can help you build wealth...when used the right way. But if you're using consumer debt to finance a lifestyle that you can't afford, it can be devastating to your future.
Here's an example: Danny has a promising job as a technology manager for a growing company. He earns a good salary, is at the top of his game, and knows his future is bright. He moves into a luxury apartment that's a stretch for his income. He goes on a shopping spree to fill his new bachelor pad with furniture, expensive electronics, and a well-stocked bar. In the course of a few hours, Danny charges $30,000 to a credit card that he figures he'll pay off as soon as he gets a raise at work.
Let's see how this rookie mistake plays out. Since he doesn't have great credit, the interest rate on his credit card is high--19%. If that big raise or promotion never comes through, and he only makes minimum payments of 3% of the balance, it'll take a whopping 27 years to pay off! He'll pay over $33,000 in interest alone, which more than doubles the original price of the stuff he bought. That's $33,000 that Danny could have been putting aside for his retirement or a down payment on a home.
Rule #3: Investing Early Is Powerful
The third personal finance rule is that investing sooner rather than later brings massive advantages. Putting away smaller amounts of money that grow for a longer period of time is exponentially more powerful than investing larger amounts of money later on. Why? The earnings your investments make have more time to generate additional earnings, which is called compounding.
Take Chris. He's a smart new graduate who works in sales for a Fortune 500 company. Though he wasn't entirely convinced that he could afford to contribute to the 401(k) retirement plan, he signed up to contribute $50 a week anyway. Assuming Chris never increases his contribution throughout his entire career and earns an average of 7% on his investment, after 40 years he'll have over half a million dollars to spend during retirement! That's impressive considering he only had to contribute $104,000 of his own money to amass that nest egg.
But Chris's boss, Jennifer, isn't so smart. She waits until she's in her mid-forties--just 20 years or so away from retirement--to start investing. To accumulate half a million dollars in 20 years (assuming the same 7% return), Jennifer has to contribute over $220 per week, or $230,000 of her own money. That's more than double what Chris will contribute, to have the exact same retirement nest egg. So you can see that when it comes to your personal finances, time really is money!
Laura D. Adams is a personal finance expert. Her latest book, Money Girl's Smart Moves to Grow Rich, won the Excellence in Financial Literacy Education (EIFLE) Award for 2011. She is a freelance writer, speaker, financial life coach, business consultant, and entrepreneur. Laura holds a BS from Sewanee and an MBA from the University of Florida.
QUICK AND DIRTY TIPS FOR LIFE AFTER COLLEGE. Copyright 2012 by Quick and Dirty Tips.
