From Dad to Grad: A Few Words of Advice
Personal-finance tips for my son — and other new college graduates — about to enter 'the real world'
Richard Eisenberg is the senior Web editor of the Money & Security and Work & Purpose channels of Next Avenue. Follow Richard on Twitter @richeis315.
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My beloved son Will, a future filmmaker/screenwriter, just graduated from USC on Friday, so I thought I’d use my weekly money blog to offer some personal finance and career advice as he and his peers enter “the real world.”
Since Will’s a little young to be in the Next Avenue audience, I’ll need to put this piece on my Facebook wall for him to see it. But perhaps you have a son or daughter about to do the "Pomp and Circumstance" walk who might find these tips useful.
At this time of year, plenty of wise and not so wise folks take the opportunity to shower newly minted college grads with advice.
Some commentators are downright nasty (“Please spare us the self-pity about how tough it is to look for a job while living with your parents,” wrote The Wall Street Journal’s icy Bret Stephens).
I’d like to be practical.
Since your diploma is from USC’s School of Cinematic Arts, I thought it only appropriate to offer my advice under headings of three films:
The Usual Suspects
A good principle for managing your money is to beware of a potential financial killer: debt. (The same goes for taxes, but we can talk about that when you start making enough money for this to matter. Hoping that’ll be soon.)
The average person in his or her 20s has about $45,000 in debt from credit cards, car loans, student loans and mortgages, according a PNC Bank survey.
Fortunately, you graduated free of student loan debt because I started saving for college literally the week you were born and because you were fortunate enough to receive a scholarship from USC. And I paid cash for your VW Golf, so neither of us would be stuck making monthly payments for it.
But I have three rules so you'll be a smart credit-card user:
Know the card's interest rate and late fee penalties. It's stunning how few students do. Just 15 percent of college students with credit cards in their name know the rate they pay for carrying a balance, and only 24 percent know the penalty fee for late payments, according to a recent survey. By being aware of these often-exorbitant rates, I think you'll push yourself to avoid owing them. You can compare credit card interest rates at bankrate.com.
Try to pay off as much as you can each month. The minimum payment is not acceptable. Since you'll be entering a field where income is unpredictable, I'm not expecting you to pay off a card in full very often, especially at first. But paying just the minimum can jack up the cost of what you buy significantly. As John Pelletier, director of the Center for Financial Literacy, just noted on Marketwatch.com, if you buy an iPad with an 18 percent credit card and make just the minimum $15 monthly payment, the iPad will take 62 months to pay off and will cost you $923 instead of $600.
Never make a late payment. This also holds true for your rent, and any future mortgages or car loans. A late payment will ding your credit rating and could make it harder for you to get a loan at a decent rate.
Speaking of credit ratings, let me share a smart tip from Lynn Brenner of Reuters: Get your free credit report at annualcreditreport.com to be sure the credit bureaus have your credit history listed accurately. If they don't, let them know — and let me know.
Now a few words about saving.
Since you’ll likely bounce from one film or Web video job to another, with work-free (translation: no-income) periods in between, you need an emergency savings fund.
The excellent Moneyasyougrow.org site from the President’s Council on Financial Capability recommends that you put in at least three months’ worth of living expenses — six to nine months’ worth if you can. My former Money colleague Beth Kobliner, author of Get a Financial Life: Personal Finance in Your Twenties and Thirties, is a member of that council and I always trust her advice. (You should buy her book.)
Since you probably won’t have a staff job in your line of work, you won’t be able to fund an employer-sponsored 401(k) savings plan the way I could. That means it’s up to you to save for retirement.
I realize retirement seems about as far away as the Star Wars galaxy. But the sooner you start squirreling money away for it, the better. You’re allowed to invest (and deduct on your taxes) up to $5,000 in an IRA this year. I don’t expect you’ll be able to go all in, but even $2,000 would be a worthy start. As your income grows, you can increase your annual IRA contributions.
As a rule, I suggest you invest in mutual funds or their cousins, Exchange Traded Funds (ETFs), rather than buying individual stocks, for diversification. But I also think you might enjoy owning shares in a company you can relate to with strong long-term growth prospects, such as Facebook (after the initial IPO hysteria ends).
My last piece of money advice, which may not seem like money advice, is this: Stay healthy. I know that when you’re 21, you think you’re invulnerable. But life is full of surprises — sometimes unpleasant, costly ones.
Right now, Mom and I are able to provide you with health insurance coverage because the health-reform law lets us keep you on her company’s policy until you’re 26. (The Supreme Court may knock down that law in late June, though.)
But after age 26, you’ll need to buy health insurance on your own, and that can be mighty expensive. The healthier you are, the lower your premiums will be.
Keeping your cholesterol and weight down can also help prevent you from becoming diabetic. I wish someone had told me that, since I'm now living with that chronic disease and paying a lot for pills to treat it.
You’ve done an excellent job staying fit so far; keep it up.
Investing in yourself is truly the best investment you’ll ever make.