Increasingly, questions are surfacing surrounding personal finance for all wakes of life (18 years old all the way up to 40+). This post will focus on a College Student who already has a strong set up as follows: 1) No debt, 2) Cash flow from a job and 3) Spending habits in check.
In this scenario here is how you should think about your personal finance.
1) Credit Card for History: Immediately get one. One of the major ways to increase your credit score is by having a long standing track record of on time credit card payments. From now on you should not take out your wallet and spend with cash. Even if you are in a rush and are buying a $2 item, use the credit card. To reiterate, this assumes you have spending habits in check, treat your credit card like it is cold hard cash.
This is a credit card you will never close so choose wisely. Pick up a no fee cash back card. American Express has a blue cash back card, there are certainly ones from Visa and Master Card as well. The idea here is since you will never close the card you want zero fees associated with it and some small reward, call it 1% cash back.
Reiterating the point, it is to build a history of timely payments over a long duration, set it up on auto pay and forget about it.
2) Set Up Emergency Cash: The tired old rule of 6-9 months of living expenses just doesn’t work or make sense. You want some cash in case something bad happens (accident or otherwise) but anything beyond a few thousand dollars is overkill. Feel free to choose as you wish but anything over $5K seems outlandish on paper. Stick the $5K in a money market, never touch it and every year at the end, transfer the interest into your investment account. If an event occurs where you need to shore up more than $5K, simply sell some stock/bonds.
3) Set Up an Investment Account: You’re young. The chances of knowing a space well enough to invest and make real profits is quite low. You’re unlikely able to research and pick a security just yet so play it safe and go open a low cost brokerage account. The account should have no serious fees associated with it, only a $5-10 charge per trade. That should be all.
After choosing a brokerage account you will need to read a basic long-term investing book. After you do, find an index or bond fund that should yield 7%+ over the long term. Do not waste your money with a financial adviser, simply wait until you have another $2-3K or so to purchase more shares of bonds/index funds. This way you do not get burned by transaction fees. As an example:
Person 1: Buys new shares every two weeks, total purchase $300 in shares. However, the cost of putting in the order is $7 or 2.33%. ($7/$300)
Person 2: Same job but buys shares every ten weeks, total purchase $1,500. However, the cost of putting in the order is still $7 which is only 0.5% ($7/$1,500)
Don’t get eaten up by fees, a good rule of thumb would be to wait until the fee was under 20bps, this would equate to roughly $3K. In the mean time, during the waiting period to buy another lot purchase of $3K leave the money in a money market account from Step 2.
4) Create a Journal. You can create a blog or use a personal journal but the idea is to write down on a weekly basis what you learned. What does this have to do with financial advice? Well now you’re finding out what you are an expert in. For example, say you spent the last 21 years studying bio-chemical engineering. Chances are you know quite a bit more about biology and chemistry than your average peer. You can continue to build on this base of knowledge and become an expert in this field. This applies to anything from becoming an expert in technology to mens clothing. Which allows you to slowly learn Step 5.
5) Obtain Niche Investment Knowledge. Assuming you are doing the first four steps to the T, after a long enough time frame you’ll understand new trends in your field. Using the biology/chemistry example perhaps now you understand this space quite well. You notice a trend in the space and believe (insert company) has the best product and will result in displacing (insert product/company). Now you have an investment play.
Notice, this takes a long time, you’re developing knowledge that you can leverage to invest in a security over a long time frame. In the mean time you are spending the rest of your time writing down new information, keeping a safe emergency fund and letting the rest of your money grow over time at a decent clip.
That wraps up the basics, just like everything else in life you slowly build up a base of knowledge until you can take full advantage of it. In the mean time, you can keep your money working for you, with low fees as a percentage of purchase, without attempting to “out trade” the professionals… Which you won’t.
I know you recommend Mint quite a lot but the more I use it the less I see the point in using it. It kind of tells me what I already know. Why are you even a fan of it? You must be seeing something I am not.
Mint forces you to be honest about your spending and question what you need and don’t need. Most people have no clue that they are spending 20-40% more on (insert category) than they need to.
Seems like the point is to invest in yourself?
Correct, when you’re young for the time being you invest in your breadth of knowledge in topics you enjoy. Could be anything from health, to oil and gas, to reading many factual books on fashion.
Avoid reading for entertainment purposes for the time being.
This makes sense. It’s almost impossible to know how to invest in every sector. Even hedge funds have different PMs for different sectors.
Great list guys- Good work!
As per the credit card situation; I completely agree. On one hand, you have the students who are trigger happy with their finances and wantonly swipe their plastic as if they will never have to pay the bill. I won’t even get into the problems these people face as we are on a finance forum and that much should be obvious. These people are usually all around financial idiots (read: taking out the maximum financial aid loan amount when unnecessary or not even for school purposes).
On the other hand, you have students who are financially very conservative. They have heard the horror stories about credit card debt. It’s good of them to take note and learn from others; but if they heard the success stories, they may feel differently.
Not only are credit cards a great way for a young man to begin building his credit, but a way to earn some awesome rewards and cash. I made over $300 last year from bank deals and credit card rewards alone (granted I owned a small business). I would suggest that you get 1 credit card when you turn 18 and then 1 more each year until you turn 21.
Will opening one line of credit every year hurt your credit score? No. Chances are that your line of credit won’t be very high anyways. Here are the keys to making money with credit cards:
1) Find them with no annual fee – For the beginniner, you need not buy into a card with an annual fee for expedited rewards. With zero annual fee any rewards that you earn are over and above what you initially invested. Chances are though, that these cards will have a higher APR (read: 2)
2) Always pay them off on time – If my credit cards offered me back 10% rewards but had an 80% APR and no annual fee, I would snatch that deal up in a heartbeat. To the financially savvy, credit card APR does not mean shit. You are not using these cards for money that you do not have young Bernanke. You must use them as a deferred payment debit card, meaning, that if you don’t have $1,000 in your checking account, you will NOT be buying anything that goes over $1,000. APR is for suckers, but hey- there is a reason that they can afford to pay us such rewards; it’s due to idiots making minimum payments.
3) Diversify – This simple yet universally applicable concept can be applied to credit cards as well. The power cards that I have right now offer me what I call “The Power of 3”. Of these cards- Amazon Rewards, American Express Cash Back, Bank of America Cash Rewards – each offer my 3% cash back in the areas of which I use them most. For example: My Amazon card gets me 3% cash back on my textbook purchases, work out supplements, e-books, hot tub chemicals, gifts for others, etc; anything you can buy on Amazon will yield you 3% cash back. You can also use accumulated rewards to net against your other purchases. Next, My American Express card gets me 3% cash back at the grocery store. Shit, a guys gotta eat- why not get a 3% built in subsidy? Finally, to pump my liquid assets on wheels full of fuel – I take my BOA card and get 3% cash back on all the fuel I buy. If I throw in a car wash at the pump this is factored into the total as well. I have to drive a lot for my small business and was getting close to the maximum ($45) in rewards every quarter from this card alone.
The best part about all of this- no annual fee, no interest paid in, augmented credit, and CASHHHHH BACKKKK.
PS- They always raise my line of credit every year; just to tempt daddy to slip up. Not gonna happen.
Also should note it is okay to shut down cards. Just not the first one you open.
Example with your set up by 21 you have 3 cards…
At 22 shut down card 2. Wait 6 months, apply for another rewards card take the benefit. 1 year later shut down card 3…
Wait six months… Repeat…
Never shut down card 1 though. That would hurt your credit score too much. Most guys don’t know how the credit system works so they live in fear of opening and shutting cards.
My father always suggested to never ever close a card. I’ve kept both of them open and I just simply ignore the second one, he has told me that they won’t ever close it so your history is secure and unless you have a temptation to close it you’re all the better.
Yep- I agree on the first one. Mine is simply a Wells Fargo with a $700 limit that I had when I turned 18. I don’t use it anymore but it is definately still open.
As an addendum to my previous rant- Make sure to time out your applications for said credit cards while they are offering an introductory offer.
Often times they will give you $50 or so just for spending $500 in the first 3 months. This is much easier to do than you think. If you put your groceries, gas, protein, booze, etc on it- you’ll hit that mark real quick.
Discover card had something like that for $100 a couple times last year- I may get on that this year. The only downside is that not many people accept Discover, but it’s a great rewards card for its applicable uses.
At least in Canada, two major banks don’t want to hire people with bad or no credit history. Something to consider for college students trying to work in finance.
I had to find that out the hard way 2 days ago…:(
I’m getting a credit card today, so this article and the comments by Chase and WSP were rather timely as well.
I have two #1’s and I’ve been really thinking about doing the #4 and writing a blog about my financial thoughts and maybe by the time I’m thirty or forty I can look back with hindsight and laugh at my risky or foolish thoughts and investments or be happy I did what I did and maybe grow from it.
Right now I have no idea how to invest. I worked at a company during the summer last year and everyone was telling me to get into stocks and to open a brokerage account, one guy was all about index funds and gold, my manager was telling me to buy real estate or silver, and one guy was saying to buy big blue chip companies that pay high dividends and just get a lot of dividends over time and go long.
I think you are a big proponent of index funds and I understand the appeal but I am actually thinking about a long-term dividend portfolio, and the market has me really scared to the point I don’t want to jump into equities until the next market meltdown happens. What should I do? What do you think of zero coupon treasury bonds and opening an IRA? I’m so damn eager to get started but the market is at the top and I missed my chance in September….
If you’re looking to invest in dividend paying stocks over the long-term you should really look into taking classes or reading up on how to read a company’s financial statements. Publicly traded companies are required to post their quarterly and annual financial statements on the SEC website. Just enter the company name or ticker symbol into the quick search (link below) –
http://www.sec.gov/edgar/searchedgar/companysearch.html#
I won’t get into them as there are many; but a good investor/accountant knows how to identify the red flags when it comes to financial shenanigans. I encourage you to check out your favorite companies and sift through their 10-K. You’d be surprised at how much they have to disclose in the footnotes as well as their key employee compensation plan. Also important is to look at the pending litigation factors. Most companies will not write-off what would seem to be a lawsuit that they are sure to lose. This will make the financial statements rosier than they should be. If they get sued and need to draw cash- it could come from the same source of funds that supply your precious dividends.
For example:
“As of December 31, 2012, we believe that our top five stockholders control approximately 41% of our common stock. These few significant stockholders, either individually or acting together, may be able to exercise significant influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of the company or our assets. This concentration of ownership may make it more difficult for other stockholders to effect substantial changes in the company, may have the effect of delaying, preventing or expediting, as the case may be, a change in control of the company, and may adversely affect the market price of our common stock. In addition, involvement of certain activist stockholders may impact our ability to recruit and retain talent or otherwise distract management. Further, the interests of these few stockholders may not be in the best interests of all stockholders.”
Taken directly from the 2012 Netflix annual statement… Interesting eh? Is this a sign of financial distress? No. But the 10-K’s are packed with information similar to this. If you are going to invest; you must research beforehand.
Concerned Child- If none of those guys giving you advice were millionaires; note it duly. You owe it to yourself to find out the best option for YOU. As WSP has said many times before… No one will do it for you. Wish you the best!
I’m about to enter college this Fall and will be taking student loans and I’ve been taking your advice. I’m working on building my credit score and working part time at a car dealership (for money but also sales experience) and doing Uber on the weekends and other misc. tasks to make $ and save. Also have 5k in a money market for emergencies. Long term plan is launching a career in IB.
So should I start DCF investing in VOO or SPY every month right now or should I not invest until after college when my debt is paid off?
The plan would be to liquidate the ETF investments towards the end of college to pay off my student loans. Is it just better to wait until I’m debt free after graduation? The short term goal is to graduate university with little to no debt of course.
Love the blog by the way, it’s a goldmine.
Covered search college in search bar.
Long story short graduate with zero in debt.