Financial advice for the Class of 2009
Stuart Ritter teaches college students at Johns Hopkins University about personal finance. (His day job is being a financial planner with T. Rowe Price Associates.)
Most of his students are college seniors. Ritter says he wants seniors to leave the class knowing how to prioritize and think long term.
"Up until now, their lives are broken up in three month chunks. Now they have to make decisions for literally decades in the future," Ritter says.
Their lifestyle decisions, such as the kind of car they drive will or participate in an employer’s retirement plan, will have an impact on how much they can save for a house or even when they eventually will retire, he says.
Ritter sends his students off with a list of tips. It's good advice to anyone trying to get finances in order. We post them here:
Budgeting
1) Be patient. Biggest mistake is trying to replicate in a few years the lifestyle it took your parents decades to achieve.
2) Match your income to the three kinds of expenses: Fixed, Flexible, Unexpected
Fixed are decided when you make one big decision (live alone or with roommates)
Flexible are controlled by the myriad small decisions you make (eating out)
Unexpected . . . aren’t. Something unforeseen will always come up (car repairs, gifts for a wedding, sudden trip), so include a “catch all” category in your budget.
3) Saving money means doing a little more or a little less of something – not all or nothing.
For example, bring your lunch two days a week instead of eating out all five.
Buying the first two years of a car can cost more than years three through ten combined.
4) Do the three month test – commit to the savings plan below for three months. After that, re-evaluate. Most people find that their budget adjusts – and they feel good about the savings!
5) Balance your goals
a) Pay off credit cards
b) Save in 401(k)
c) Build emergency fund
d) Get insurance.
Saving/Investing
1) Save 20% of your income – 10% for retirement, 10% for your other goals (car, vacation, house). The more you save, the sooner you can have it.
2) For retirement, use your employer’s retirement plan and/or a Roth.
a) Invest in a Retirement Date Fund.
3) Automate the process!
Credit
1) Don’t pay off student loans any faster than you have to. There are better things to do with your money.
2) The only proper way to use credit cards is to pay them off, in full, every month (it can add 20% to the cost of an item to borrow instead of saving for it ahead of time).
3) Pay what you’re supposed to, when you’re supposed to. Your reputation will be assessed by:
Anyone considering you for a loan – car, house, credit card (you’ll pay more if you have a history of bad credit)
Potential employers
Insurance companies
Prospective landlords
Insurance
1) Get renter’s insurance – provides liability exposure, as well as protection for your possessions (could you really go out and repurchase all your stuff if something happened?). Can cost as little as $20/month.
2) Get health insurance – even if it’s a catastrophic policy to tide you over after you leave school and before you pick up an employer’s policy. Can cost as little as $50/month. Ask your parents to do this for you.
