(Read Part I or Part II of this series)
College is an excellent time to start in on your finances, because you have several factors on your side. You don’t have too many financial demands on you yet – your room and board are probably rolled up into your financial aid. But best of all, you have time – “vast acres of time in which you plant crops,” as my hero Joss Whedon would put it. You have about 40 years until retirement age – double the amount you’ve been alive so far! And best of all, most of your peers won’t start thinking about their own finances until five years from now… or possibly later. It’s the perfect time for…
Part III: Getting Your Head Start
Albert Einstein once said “The most powerful force in the universe is compound interest,” or possibly “Is the greatest invention of man” – accounts differ – but the point is, he’s friggin’ right! I prefer to put it as “Compound interest + time = WIN!” In any case, the most important ingredient is time. You might think you have no need to think about retirement until after you’re 35 or 40. But, do you know how much those 15-20 years could cost you in interest alone?
Let’s take a pretty easy example. Let’s say your grandparents gave you $1,000 today, because they’re grandparents and that’s what they do. Ok, so you can either spend it or invest it for retirement. If you invest it at 10% (compounded annually), how much would you have in 40 years (retirement time!)?
The answer: $45,259.26
You can bark all you want about how $45,000 won’t “really” be $45,000 40 years from now, because of inflation, but it will be worth much more than $1000, I can tell you that. Ok, so, what if you wait until you’re 35 (assuming that’s 15 years from now)? Of course, since you’re now 35, you decide you need to play catchup, so you invest $5,000 instead of just $1,000, for the next twenty five years. How much would you have at age 60?
The answer: Only $54,173.53
Yeah, even though you put five times as much in, you only end up with $9,000 more than if you’d put in $1,000 15 years earlier. If this hasn’t convinced you that time is more important than how much you put in, then I don’t know what will.
If I do have you convinced, I know you’re wondering where the money to invest is going to come from. You’re in college – you’re broke! Oh trust me, I feel your pain. I’m probably poorer than you (hence the name). But the idea is to start looking into things now, which will give you the head start to invest in a couple of years, which will give you the all-important extra time to let your money compound. Here are some tips I have for you to get your head start:
Learn all you can about personal finance. If you’re reading this, you must have at least some tiny interest in it. There are books and especially blogs that aren’t at all boring, and will teach you a lot about money. I started off with The Motley Fool’s Investment Guide for Teens
and then a year later, found I Will Teach You To Be Rich. After that I moved into all of those sites you see in my sidebar under “Finance Blogs.” I also recommend Suze Orman’s YF&B
(you can read my review here).
Live like the broke college student you are. Now is the time to live off of ramen and free food at club meetings. Or at the very least, get the cheapest housing and car that you’re comfortable with, and definitely don’t run up your credit card debt trying to keep up with your friends who all have new PS3s and DVD collections the size of the Library of Congress. Borrow their DVDs and play their PS3! Live as frugally as possible, and continue to do so after college to continue to save money.
Find some money. There’s tons of free money that you probably don’t even know you’re passing up. Scholarships. Upromise. High yield savings accounts. Selling stuff you don’t use on ebay. Selling your old textbooks. Oh, speaking of that…
Don’t buy your textbooks new. New textbooks should be a last resort. This is especially meant for freshman, who really don’t know any better. Be smarter than the other freshman! And upperclassmen: don’t act like freshman and buy your textbooks new. Tsk tsk.
Build some credit. I already recommended you get a credit card, but I wanted to get into it further. Credit cards are not licenses to buy things you can’t actually afford – they are tools to build credit. Why would you want to do that? Well, I assume someday you might want a house. Or a car. Or a job. Yeah, even employers (sometimes) check your credit score during the hiring process. I’m not saying this to scare you… well, ok, I am. A little. I want you to see the importance of building a good credit score, which, not surprisingly, takes time. But you have time! Hurray! So, get a credit card, and use it for just ONE thing. Here are some examples:
- Get a card with cash back for grocery purchases (and no annual fee). Use it ONLY to buy groceries, and don’t buy more than you would if you were using your debit card or cash. Pay the balance in full when the bill comes each month.
- Get a card with cash back for gas (and no annual fee). Use it ONLY to buy gas for your car, and don’t buy more than you would with a debit card or cash. Pay the balance in full when the bill comes each month.
- Get the Amazon.com Visa card (which has no annual fee), which gives $30 off your first Amazon purchase with the card, and 3% returns (in the form of Amazon gift certificates) on Amazon purchases. Use it ONLY to buy TEXTBOOKS. Ok, maybe a few other Amazon things too, but don’t buy more than you would with a debit card or PayPal. Pay the bill when it comes – with your financial aid (for the textbooks, anyways)! Or even better, have the bill sent to your parents’ house, and have them pay for it. Just make SURE they pay the bill on time, because it’s your credit at stake, not theirs, so it’s your responsibility.
Did you notice the two points I hammered into you in each of those? No annual fee and pay the whole balance when the bill comes. Annual fees are dumb – there’s so many cards without them, there’s no reason for you to get a card with an annual fee. And paying the whole bill ON TIME (not just the minimum balance!) is your key to no debt and a great credit score.
And that’s it. If you’ve made it this far and you’re hankering for more advice, it’s time for you to branch out and check out some of those books and sites I mentioned. And take heart – you have your head start!
Hi, Nice Post!
I too am just starting out with a finance blog, although I’m chronologically 2 years ahead of you in terms of life (which doesn’t mean much in terms of experience).
I just wanted to point out two things:
1) Adjusted for inflation, your $45K figure is still worth about $4,400, or a 4.4x difference.
2) Sometimes, carrying debt on credit cards can be good, because more companies will compete for your business.
Finance Guy: Thanks, I’m glad you liked the post! In response to your points:
1) That may be true, but then you have to compare that number to what the $1,000 would be worth in 40 years as well, instead of simply saving there’s a 4.4X difference – because you have to compare what the $1,000 would be worth if you had simply put it in a safe deposit box or checking account and left it there. I don’t have an inflation calculator in front of me, but using your number to assume $45,000 is worth about a tenth of it’s value, and then $1,000 would become $100. So it would still be $100 going to $4,400 – significant growth.
2) Although you may be right, I wouldn’t feel comfortable advising a fellow college student to carry debt on purpose. The reasons behind this post were to encourage good credit habits to yield an excellent credit score by the time someone goes to get a loan. And in theory, if you spend many years building up your credit score, companies will compete over your shiny credit score!
I think most college students don’t know how to handle their finances or even a credit card! A friend of mine back in those days didn’t even know how to use an atm card. so yeah.. goes to show you don’t want to encourage people to take on more than they can handle. of course money is a gradual process — you have to make the right decisions at every step —
Hi Stephanie,
You bring up some great points. It’s useful to be concerned with finances from early on so they’re less likely to “get away from you.”
I agree with finance guy on a few things though. You would benefit from learning the difference between ‘good debt and bad debt’ which would teach you a few things about leveraging money. Robert Kiyosaki wrote a series of great books beginning with “Rich Dad Poor Dad.” His wife Kim Kiyosaki also recently published a book specifically about investing for women. I highly recommend them.
Liara: Thanks for coming by! I haven’t read Kiyosaki yet, although I plan to simply because he’s such a big name. I do recognize that there are good and bad debts: obviously, a mortgage would be a good debt – since it’s likely to give returns, and since it puts a roof over your head. I also see a car loan that enables you to get to a job every day as a “good debt.” Student loans are usually good debts too – although I encourage my peers to know exactly how deep they’re getting into their loans!
However, I do not usually consider credit card debt to be a good debt. There are obviously individual cases in which it could be, but in general – especially for college students – it’s a bad debt, and wracking up bad debt at a young age is establishing a bad habit right out the gate.
Great post! Linked.
Hello:
I’m a 26 year old law student – months away from graduating. I’d love to find a book that will help me get my finances in order and pay down my student loans stat!
YF&B sounds great but it’s very U.S focused. Would you be able to suggest something with Canadians in mind?
Thanks!
Karen
PS: I floated over here from the NYT link – glad I did!!!
Karen: I must admit, you’ve stumped me. I haven’t read any books targeted towards Canadians (although I still maintain that Rochester is close enough to the border, and that we carry enough Canadian change here that we ought to be considered Canadian), so I can’t give any real recommendations. Maybe someone else who reads these comments can help? My suggestion would be to grab YF&B anyways – although some of the specifics might not be relavent, the broader topics of the book still are. After you’ve read it, you will want to read something like the Complete Idiots Guide To Personal Finance For Canadians, which will give you specific information about Canadian accounts and taxes and laws.
I hope this helps some – if I find out anything more, I’ll do a post about it, so watch the blog for that.
Stephanie:
Thanks so much – I’ve gone ahead and gotten YF&B. After that I’ll read the other book and hopefully my tax law class will even come in handy! lol
I’m very excited to get going on this whole thing………..
Cheers!
Karen
This is interesting, but you leave out the most important thing about investing money into a HIGH RISK account. First off it is a HIGH RISK account if you want 10% interest compounded daily (you don’t need to compound your account any more often than that). Second – in order to come out on top in the end your interest needs to beat the inflation rate. If inflation is growing at 12% while you have a 10% interest account then you are losing money by about 2% every year off of the value of the money when you first put it in. If it were to continue like that then it’s like putting $1000 into the bank and it becoming $500 instantaneously.
of course The inflation rate in any nation is usually around 2-5% so a 10% interest rate would normally be a good thing. But of course the banks KNOW this which is why they make the account HIGH RISK meaning if the bank starts going south and having to pay out your account gets offed first.
Fred: The compounding I wrote about was compounded annually, not daily. 10% compounded daily would be a very high risk investment, indeed!
It’s true, inflation is usually around 2-4%. And while that does eat into a 10% investment, it doesn’t cancel it out or mean you shouldn’t do it.
Also, this doesn’t have a whole lot to do with banks, but as far as them “offing your account,” they won’t, so long as the account is FDIC insured. There are some accounts that aren’t FDIC insured (Money Market Accounts, for example), where this could happen. That’s why you should always be aware of whether your bank account have FDIC insurance or not.
But in general, what I’m talking about with the 10% interest rate is stock investments. I know it’s something I haven’t covered in detail – if you’re interested in the subject, I highly suggest this book: The Bogleheads’ Guide to Investing
I don’t think the whole using credit cards thing is a good idea. I also don’t think there is such thing as “good debt”; all debt is ultimately just a way for banks to make money off of you! I ended up with so many credit cards; one was for my parents to use and pay, one was for emergencies, one was for me to buy what I needed and then my parents would pay off the balance, one was a great introductory rate, blah, blah, in the end I filed for Ch7 bankruptcy.
If you get a credit card, you are doing business with a multi-billion dollar industry. Do you really think you’ll get ahead? Even after a bankruptcy, probably because of my student loans, I still have a credit score that’s 700+. There goes the “you need credit cards to build your credit score” theory.
Check out Dave Ramsey’s site, he has some good words.
@Nick – It’s true that credit cards aren’t for everyone. But the reason I suggest them is that they ARE a good way to establish a credit history. In fact, I saw this happen just the other day: a friend of mine is very lucky, he’s getting through college and now grad school with absolutely no loans! This also means he has absolutely no credit history. Banks aren’t willing to touch him with a ten foot pole – we found this out when he tried to get a credit card (to establish a credit history!). He was denied for having no credit history.
Luckily, the second time around, he was approved for a student card. Of course, it DEFINITELY matters that he is the type of person who will be very careful with his card, and never spend what he can’t pay off immediately.
Dave Ramsey has some great philosophies, and I know he disagrees with me on this topic. But if you don’t have any other loans to establish a credit history, you could end up screwed.
Hello,
Since I discovered this site, I thank God that I didn’t blow my $1000 on crap. I don’t know what to do with it. Someone borrowed $500 from me so now $500 is siting on my savings acct in a credit union. I don’t know what will $500 will get if I buy stocks? I don;t know what to do.
It’d be nice to help π
@Katarzyna: it all depends on your time frame. If you want to be able to use that money within the next 10 year, then your money is probably best where it is – a savings account. If you want it to grow over the next 10 years (or longer), you should look into investing. If that’s the case, I can recommend a book to get you started.
As a college student it was really hard to save some money from my monthly allowance. And I’m still thinking twice if I’ll get a credit card. I’m afraid i might not be able to pay my bills.
College can drain your wallet fast. Before, when I was entering my my senior year of college, in there I found out juts how hard it is to find some extra cash, either for entertainment or other reasons.
I was a working student when I was in college. I entered as a student assistant assigned in the registrars office of our school. The school pays for all my tuition fees and they also give me an allowance every much.
Very hard to work while studying but its all worth it.