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!