How Graduates Can Maximize Their Finances
Brian Hershberg
Apr 28, 2007
(See Corrections & Amplifications item below .)
Graduation season is almost here, and with it a flood of soon-to-be-former students are facing financial decisions that can affect a lifetime.
From managing student loans to dealing with a mailbox crammed with credit-card applications, there are pitfalls at every turn. Yet there are a few things new grads should focus on to avoid those traps. Some tricks can even help make a too-small paycheck feel a bit bigger.
Two key areas to focus on are managing credit wisely, and saving for retirement. The first step: "Throw those offers from your mailbox away," says Bonnie Hughes , a certified financial planner in Kennesaw, Ga.
It's not that they're necessarily bad offers, but there's a better way to find the right deal. Sites like rewardscards.com and creditcards.com offer side-by-side comparisons. Look for no-fee cards that either offer cash back or rewards plans that match up with particular interests, whether clothes, travel or dining.
Crib Sheet
Smart financial steps for new grads:
- Choose credit cards carefully (to build a credit record while scoring rewards points).
- On top of starting a 401(k), also consider a Roth IRA.
- Continue to live like a college kid -- on the cheap -- but use the credit to pay for necessities and rent, if possible.
Then, use the rewards programs aggressively. A smart way to do that: Use cards mainly as "a cash-flow tool," Ms. Hughes says -- that is, chiefly for paying ordinary monthly expenses, such as gas and food. And pay off the card promptly and in full.
Another trick: When apartment-hunting, ask if a property manager accepts rental payments by plastic. It's an easy way to rack up rewards points. A few companies do this, including AvalonBay Communities, which has more than 100 apartment complexes around the country.
The tough part of all this: avoiding the temptation of charging extravagances like flat-screen TVs or vacations. Instead, save in advance for big-ticket items. They can still be put on the card (thus scoring more rewards). But saving in advance means you'll still have the cash available to pay the bill each month, which avoids carrying an expensive balance.
Using cards this way can quickly build up a good credit history. That, in turn, is key to obtaining better insurance and mortgage rates, and other advantages.
In general, start with no more than one or two cards, Ms. Hughes says. The more cards, the tougher it is to pick up meaningful rewards.
Next step: Save for retirement. Naturally, put the maximum possible into an employer's 401(k) program -- or at least enough to garner any company match. After that, consider opening a Roth IRA.
A Roth IRA lets investors with earned income up to certain levels contribute after-tax dollars, also up to set levels. (The details are listed at irs.gov .) Although there are restrictions on early, preretirement withdrawals, distributions are tax-free.
Tom Potts , professor of finance at Baylor University in Waco, Texas, is a big believer in the Roth IRA for young people because of the potential for long-term, tax-free growth. They get overlooked because they tend to involve setting aside large chunks of cash now for an unseen benefit later.
For new grads who have trouble scraping together enough cash to invest in a Roth IRA, Ms. Hughes offers this: "Maybe an angel investor -- or an angel relative -- can help." Call it a graduation present.
Corrections & Amplifications:
Contributions to a Roth IRA are made with after-tax dollars. This column incorrectly says contributions are made with pretax money.
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