I was recently visiting my father-in-law and read an insightful article by Candice Choi in the Virginia Pilot (5.29.11) focused on financial life after college. I agreed with so much of it, that I wanted to put my own spin on her ideas. So, here goes….
Many young people are getting ready to start their work lives, having completed their education. Congratulations, the practice of your personal financial life has begun. The “more seasoned” among us can attest to the fact that learning personal finance will never stop. Several young people have recently told me that they are scared of the economy, taking the wrong job, making major financial mistakes, and they don’t think they will either get sick or be able to retire. They are wrong.
Myth 1: There are no jobs.
Yes, the news is not bright and our newscasters pull the shades down even tighter on our outlook toward our futures. While unemployment remains stubbornly high, there are always jobs available, as there is always turnover at companies and other worksites. The key for the young person is to be ready when those opportunities arise. The worst thing is to sit at home wallow in self-created defeat. Join professional organization, do volunteer work, take a job that you don’t want long-term but that will put you in front of people to help you build your network. Making these connections and being an active member of your community will do more for your employment than posting your resume on every general job site….though that won’t hurt, either.
Myth 2: Saving for retirement is not your problem.
Yes, it is your problem. You need to begin to save for your retirement as soon as you begin work. Try to save 10% of your salary on an annual basis for this stage of your life that, admittedly, seems so far away that it shrinks in importance. It is very important. Ask yourself if you’d rather plan to live to retirement or die before then. Most would rather live. Hence, save your money. Defined contribution retirement plans which allow you to save your money for your retirement, such as 401(k) plans, now dominate the private employment sector. In fact, only 15% of private employers still maintain a defined benefit retirement plan, where benefits are provided. Compound returns over time makes saving for retirement easier. Yet, you have to save and you need to let time do the work for you, while diversification protects you from mistakes.
Myth 3: Don’t buy a home.
This could be the best chance for you to purchase a starter home, given prices and interest rates. You will need a down payment but the Federal Housing Administration still has programs where you can purchase a home with only 3.5% down payment. Locally, rates on a 30-year loan are 4.765% and 3.835% for a 15-year loan. You won’t see interest rates this low many times in your life. Before you purchase, however, make sure you will be able to live the home long enough to pay for the closing costs and to realize some appreciation. If you don’t plan to live in an area very long or the area where you find yourself is in a continuing downward spiral, renting remains the best option.
Myth 4: Use debit cards, not credit cards.
Yes, using debit cards can keep you out of credit difficulties, by forcing you to live within your means. While living within your means is mandatory for financial success, credit cards do provide fraud protection should your card be stolen or a purchase turns out to be a sham. Moreover, judiciously using credit cards can help establish your credit history – a necessity for many of life’s purchases.
Myth 5: You are young and do not need health insurance.
Wrong. You need health insurance, as well as disability income insurance. Those in the 19 to 29 year age bracket are more likely to be uninsured than are other age categories, partly due to young people having jobs that do not offer insurance but it is often a result of choice – or laziness, or ignorance. Current health care policy allows you to continue on your parents’ policy until you are 26 years old and this age limit is greater in some states. Make sure you have health insurance, as you never know when you might need it. I admit to letting this lapse in my life, when I was 27. I was lucky. I ended up on welfare, through California’s Medicaid plan, Medi-Cal, as a result of an automobile accident and a five week hospital stay for a fractured skull. This was a hard way to learn about the benefit limits of the student health insurance I carried at the University of California-Davis.
Finally, take control of your financial life now, before your financial life takes control of you. A bad start to your financial life can create a cruel master that will rule your decisions for quite some time. On the other hand, a good start on the path toward financial success will be a welcomed partner with whom to share life.
(Please, post your stories from your financial lives – good and bad. Your experiences will have a much larger impact if they are shared.)