Grad Guide 2006
Friday, April 14, 2006; 1:00 PM
Everybody loves a paycheck. Odds are, however, that your first one won't let you immediately retire into a life of luxury. In this chat, The Post's Michelle Singletary took your questions on money matters for folks who are early in their careers -- or just starting out.
This discussion is part of a series created for The Post's Grad Guide, an interactive collection of stories, resources and information aimed at easing the transition of the Class of 2006.
A transcript follows.
Michelle Singletary: Good afternoon everyone. I have to say I love,love talking to young folks. I love talking to young adults just starting because I get to catch you all BEFORE you the wrong financial decisions or confirm that you are on the right track.
Anyway, I'm ready to go.
Fairfax, Va.: Hi Michelle, I love your columns, books, and chats. Your no non-sense advice is great!
I would like to share a money management tool that has saved me more than a few times. I learned this from the Mary Hunt Cheapskate books. I opened a second bank account at my credit union (no fee). Each payday, I deposit money into the second account, to be used for irregular or unexpected expenses. This is NOT a savings account and shouldn't replace that. I try to deposit the same amount each month, treating it like I would any other monthly bill. When an unexpected expense comes up, like a car repair, an unplanned gift, or if I made a mistake in my primary checking account and don't have as much money as I thought I did, I have a back-up and don't have to run to the credit cards.
As you often comment, it's those unplanned events that can bust your budget!
Keep up the great work!
Michelle Singletary: I thought this note was a great way to start off this chat. And here's why. Lots of folks are running around trying to find the secret to wealth. The fact is the most proven path to prosperity is to follow some basic, common sense money management principles. Below is one of them. I've essentially done this my entire working life and for my entire working life I've never been broke. This includes from the time I made just a little more than $20,000 to now (and nope not telling you how much I make).
It's called paying yourself first, rainy day fund, emergency fund...and a host of other names.
But essentially if you are starting out on that first job or right out of college this is the one and true way to make sure you always have a little piece of money.
Washington, D.C.: What's your opinion of ING Orange Savings Accounts? What are the advantages/disadvantages of this savings account versus typical banks or credit unions?
Michelle Singletary: I don't really like to comment on one product or the other unless the company pitching it is doing something wrong or I think the product or service is worthless.
But I think what you might be asking is if accounts open or offered by Internet companies safe, good, competitive.
Then the answer is yes. ING is able to offer CDS and savings accounts that pay interest rates higher than brick banks because they don't have the same expenses. That's an advantage.
If you want to walk into a branch, can't do that. That's a disadvantage. So if you are just shopping based on rates certainly check them out.
If you need a lot of lobby-type bank or credit union services then perhaps this isn't the right account for you.
Hope that helps.
Laurel, Md.: I'd like to make a comment to our grad-readers that ties into Sunday's column:
Put your 401k or similar plan into stocks (the more volatile the better) and rebalance yearly and ignore just about everything else you hear about the stock market. Most of what you'll read from the stock market news is either wrong or irrelevant:
1. Stock market news media are not geared to long-term investors. To sell magazines, they have to carry news that frequent traders want to read, like "The hottest mutual funds of 2006." Ignore it.
2. Because stock market news is geared to active traders, they treat increasing stock prices as "good news." Unless you're approaching retirement and about to sell soon, this is completely backwards. You WANT stocks to go DOWN when you're BUYING them; just like you shop for the lowest, not highest, price on tomatoes, cars and plane tickets.
3. Market writers love to play up volatility by saying things like "If you bought the S&P 500 in March 2001 at 11,500 and sold in September 2003 at 8,000, you'd have lost 30% of your investment." True, but you don't put money into your 401k that way. If you buy a constant dollar amount of stocks every two weeks or monthly, the noise flattens out tremendously. The calendar is an excellent diversifier.
washingtonpost.com: Sunday's Column: Compound Wisdom
Michelle Singletary: Good advice with one caveat. I wouldn't pick stocks or mutual funds (which is what I would recommend for most investors) that are "volatile." And what does that mean anyway.
What you want is an investment that invest in companies that are large, mid-size and small, that have the potential to grow, are in growing industires, stable industries,and industries that sell or offer services in areas we all need (energy, banking, retail).
The key word is diversify.
Woodbridge, Va.: I have a student loan question. I am in my second job since graduating with my undergrad degree. I recently left a public sector job to a private sector job, as such I have between $18,000 to $20,000 in a pension plan. I have full invested in my Roth IRA since 1998 and am currently participating in my company 410(k). My questions is, should i withdraw my pension money, taking hit for early withdrawal and taxes, to significantly reduce my student loans, or suck it up and keep paying those suckers off- I just hate those loans and want them gone.
I pay over the monthly due and pay between 4 and 5% in interest.
Michelle Singletary: Don't take the hit. Keep paying those suckers off. I hate debt too but you lose so much when you cash out of tax advantaged retirement accounts, which is what I'm assuming you mean when you say "pension plan."
Washington, D.C.: I am a graduating law student and find myself in a somewhat delightful financial dilemma. I will be coming into a $16,000 settlement from the sale of my apartment building near graduation and have a job for fall which comes with a $5000 recruitment bonus. I'm also moving to a more affordable market to work for the federal government and will be paying 1/3 of the rent I pay here in DC. Great problems to have, yes?
My question is, what do I do with all this money? My job will be repaying my student loans and I know those are "good debt" which I want to pay monthly to get my credit rating up to buy a house in the next few years. I only have about $700 in credit card debt to pay off. How should I direct the rest of it? I've never invested in anything, so I'm not sure where to start, but want to use this windfall to set myself up right for the future as I start my career. Any suggestions?
Michelle Singletary: What a wonderful problem to have.
First, I like that you will immediately pay off that credit card debt.
Second, create an emergency fund 3 to six months of living expenses. In other words 3 to 6 months of living expenses and I mean everything (rent, car payment, cable, insurance, food, etc.)
Third, if you have any money left after that put it into your house fund because you will need lots to buy a home even if you have a low or no downpayment. If you think you will need this money in less than five years don't "invest" it because you don't want to put it at risk. If you won't be buying soon then perhaps look at mutual funds. I like the lifecycle funds which invest based on a target date (usually retirement but in your case you can shoot for housin fund). If you don't need the money to buy a house then let it roll for your retirement.
Fourth, be sure to be thankful for being so blessed
College Park: Hello Michelle! How I can learn to manage my 401k? Do you know any webpage or book that could guide me on this? Thanks!
Michelle Singletary: Try going to this Web site for some good basic advice for starting out
As far as books check out Smart and Simple Financial Strategies for Busy People" by Jane Bryant Quinn (Simon & Schuster, $26).
I also like my book "Spend Well, Live Rich" (Random House)
Either one or a host of others will give you the basic things you need to know about what to do with your 401 (k) money.
Also, talk to the folks in the benefits office at your job. The company that managed your 401 (k) plan I'm sure has a Web Site and a section on investing basics.
But as I said in an ealier answer. Diversify. Don't put all your money in one fund type.
New Haven, Conn.: I'm a 22-year old first-year Master's student. At the end of the current academic year, I plan on consolidating the $72,000 that I have in student loans. I also plan on consolidating the loans for the next academic year ($35,000) at the new rate, but I will not be reconsolidating. I paid off about $2000 of my $3350 credit card debt in the past few months with the money that I earned as a research assistant, so I don't intend to have any non-academic debts.
My concern is that I am going into a career in the nonprofit management. I don't plan on getting rich with this career path, but I would like to be able to pay off my student loans and preferably in less than the 30-year term. I plan on having children and I would like to be able to invest in their education and my nest egg. I was considering going into real estate on a part-time basis for several years. This task seems risky, time-consuming and overall, quite daunting, so I am considering other options. I know that people consider student loans "good debt," and I certainly value my expensive education, but at the end of the day, I still owe a great deal of money. How do I accomplish my goal of paying off these loans in 10 to 15 years with a meager income? Also, what do you suggest for supplementing my income while still being able to work in non-profit on a full-time basis?
Michelle Singletary: Wow. You have a lot on your financial plate. I think it's great you want to tackle this debt in less than 30 years.
So have a plan. Look at your income and all your expenses. Then see what extra money (if there is any) that you can apply to reduce the debt at a faster rate. One thing you should do going forward is not charge anything on a credit card that you can't pay off the next month. Getting a roommate or roommates might be one way to significantly cut your expenses.
Second see what expenses you can cut. If you've cut to the bone then yes you may need a second job to reduce your student loan debt. What that job might be is totally depending on your interests, time etc. When you talk about real estate being risky I assume you mean buying property and renting it? Then yes, might be risky for you since you don't have a cash cushion. If you're talking about getting a real estate license to sell real esate I don't see any risk in that. Time consuming yes!
Finally, if your day job is very demanding and a second job just too much then realize you may have to take the long road to pay off that student loan debt. That's okay. Hard but okay since you really had no choice.
As far as kids and retirement. Definitely save for retirement. Don't worry about the kids and their college fund since you are not there yet. Keep in mind by the time you are ready to have kids perhaps (I hope) you will have a wife or husband around to help financially with that goal.
Alexandria, Va.: Michelle,
Will you please tell the author of the car-buying portion of the Grad Guide that a recent grad should NEVER even THINK about leasing a car? Why on earth would a money-starved 20-something spend three years paying hundreds of dollars a month for -- to own absolutely nothing at the end of the lease?
As for me, I'm following your very sensible advice. Mom gave me her old car, a 1990 Chevy, when I got a job and moved to Washington, and even though I can afford to get something better now I'm gonna drive it until the wheels fall off. It's actually in the shop as I type this, but the $340 bill for repairs is less than one month's payment on most new cars -- meaning I'm saving thousands of dollars every year, even if I have a repair bill now and then. (Not to mention all the extra car tax and insurance costs people pay when they buy new.)
Seeing as how I'm glad when I don't have to drive somewhere, I don't see any sense in spending more money on something that will only encourage me to go out and get stuck in traffic. I'd rather save the money -- and the time!
washingtonpost.com: Steering Toward the Right Car
Michelle Singletary: I did read the piece and to be fair the author was just offering up ALL the options for acquiring a car.
But since I don't have to be fair I TOTALLY agree with you. Leasing is a BAD BAD BAD BAD BAD BAD BAD BAD BAD BAD BAD
NEVER NEVER NEVER NEVER NEVER NEVER NEVER NEVER NEVER
Why lease what you can AFFORD to buy. And that's the key work here afford. Yes, you can lease a more expensive care you can't afford. And when you do you are a straight up knucklehead. The old and young do it and in any case it's not a wise financial move.
You want to have money. Then make wise financial moves. Buy a used or new car you can afford and keep it until the wheels fall off. Hopefully that is 10 year at least. And here's how I save for my next car. After I pay off my car loan (early) I take those payments, which I'm used to making, and continue to make them to myself in a savings account. By the time I need another car I either have a huge downpayment or I can pay for the next car outright.
Washington, D.C.: Good afternoon, Ms. Singletary:
I was very careless with my money for several years and now have significant credit card debts. I decided late last year that enough was enough and put myself on an austerity program, took a second job, and am SLOWLY paying off the cards.
Problem is, this isn't much fun. How does one stay motivated? Believe me, spending is much more pleasant than paying the bills.
Michelle Singletary: I feel you. And good for you for paying down that debt.
I might shock you but spend a "little" and have some fun. I hope when you said you went on an austerity program you didn't mean you shut down spending on all entertainment.
If you are working hard treat yourself every once in awhile.
So go to the movies (matinee and skip the expensive popcorn and soda); go to dinner (brunch) and skip appetizer and dessert and order cheapskate lemonaide (water with lemon).
Just don't go overboard.
Washington, D.C.: I'm two years out of college and have $4k in a 401(k), another $4k in an IRA, $2,500 in a mutual fund, and $13k in a money market. Is this too much to have stashed in cash, making pennies in interest? Should I funnel more into investments?
Michelle Singletary: Is that $13,000 your emergency money? If so you shouldn't invest that --- sorry.
Rockville, Md.: Simple guidelines to budgeting your first-year paycheck (i.e. barely enough to live):
If you're paid bi-weekly like most people, that's two checks a month plus another every six months. That one pays your car insurance. One of the monthly checks needs to cover rent, housing-related utilities and the smaller of your car and student loan. The other pays your larger loan and monthly living expenses.
If your employer matches your 401k contribution, allocate enough to get the maximum match and put it all in stocks. Unless you're starting out with a substantial nest egg, just park your non-retirement savings in the best convenient interest-bearing account you can find (on-line banks probably work best).
Don't even think of buying a home until you're pretty certain you'll live there five years. Real estate round-trips are very expensive.
Budget for one "splurge." What did you spend your entire college career saying "when I get a job and a salary, I'm going to get..." This makes the rest of your budget discipline easier to handle because you're still getting what you really want out of it.
Few big-ticket items are worth buying at this point in your life (except for your budgeted splurge). You might fail your probationary period and have to start all over. Don't do it with an HDTV in your back seat and on your Visa bill. Spend your discretionary on "experiences" (travel, theatre, skiing lessons) whose memories will last a lifetime.
If you live in the D.C. area -- this is an expensive place to live, but we have a lot to offer. A Metro Day Pass is 6.50. That's all it will cost you to see American Gothic (through June 11), the Hope Diamond and a baby panda.
Also, subscribe to at least the Sunday Post, even if you also read it on-line. Peruse the Plastic Pack to see what goes on sale, how often, and for how much at all the stores.
And learn to cook most of your own food.
Michelle Singletary: Some good advice (and lots of you have it so I'm happy to pass it along).
Washington, D.C.: I am a new employee (and a recent grad) and am taking advantage of my employers TSP plan (similar to a 401 K). The TSP plan has a couple different option on how to invest, including small and medium stocks, medium and large stocks, international stocks, and more stable government securities. The plan also has what are called "life cycle funds" which balance your portfolio according to when you think you will retire. My question is this: should I go with a lifecycle fund (the longest term) which would place the majority of my money in stocks but leave some in more conservative areas, or distribute the funds myself by only choosing the most aggressive options? I am young and want to make the most of my savings. Thanks!
Michelle Singletary: Personally I like the lifecylce fund concept. It does the reallocation automatically for you. I've written a couple of columns about this so check out the Post archive of my columns. If you really aren't comfortable with trying to figure out how to rebalance your fund every year or whatever go with the lifecycle.
Upper Marlboro, Md.: Me and fiance both graduated in 2005 and have an apartment together. We would eventually like to buy something together, maybe a condo. Is it worth it to buy a home with the cost of housing in the metro DC area? We plan to move back to our home state of GA in about five years and I'm worried if we'll be able to sell it back. Should we just save for a place in GA or try to buy here since we're already paying over a 1000 a month for rent?
Michelle Singletary: Well, first how about getting married before buying property together. Or for that matter getting married before you live together.
I know lots of folks HATE when I advise this but I mean it. I can't tell you how many letters and e-mails I get from couples fighting over property because they bought it while they were dating or engaged and then never got married.
But I will answer your basic question. With such a short time line (moving in five years) it might not buy. In this market unless you buy a dog of a piece of property it's not likely you won't be able to sell it. The larger issue is will you in five years or less have any equity, will property values go down so that you are upside down in the house or cond (meaning you owe more than the house is worth). Those are the issues you have to look at when buying. Also with such a short time frame will you make enough on the sale of the house to have enough to buy another property in GA. If you sink all you have in a house in this area and then can't sell it for what you need to get to get back what you put into it (closing costs, downpayament, repairs, etc.) that's not a good move financially.
So do the math. Talk to a real estate agent here and in GA. Then you will have all that you need to make this decision.
And get married for goodness sake.
Re: $13k: Yes, that's my cushion, but it's more than 3-6 months living expenses. More like 9 months. I guess what I'm asking is, Is it better to have too much cushion and lose money over inflation or to park the extra money somewhere that makes more than 1% interest?
Michelle Singletary: I would keep the cushion safe and if you feel comfortable take the rest and invest -- as long as you don't think you will need that money in five years or less say to buy a home or car or whatever. If you don't then sure look for something with the possibility of paying a higher return. Try an index fund or lifecycle retirement fund just make sure the money is well diversified.
Re: Book recommendation: Can you recommend a book for soon to be grads? My sister and her boyfriend are going to be graduating in May. She will be starting a PhD program in Pharmacology and he will be working. We'd like to get them a book and we're also thinking about getting them individual ING accounts with some starter money for savings.
Michelle Singletary: Please see my previous answer about basic financial book.
I would also recommend you look at the archive of the Color of Money Book Club. In the last several years I've read and recommended a number of books that may help them.
2nd jobs to pay debt: The second job I took after college -- and stayed in 11 years later -- is working in fitness (I am now a personal trainer part-time, clinical research associate at an Ivy League college full-time.)
Gyms always need staff for before and after regular office hours. You get money, a free membership, the clients get to know you and socialize with you and twice, they have given me a successful tip on a job opening, including my present one.
Michelle Singletary: Great, great tip.
Washington, D.C.: I am a senior graduating in May. I don't have a job yet but will want to stay in the area and find a job. I have about $700 in savings now (and will probably accumulate about $300 more before graduation), but I guess I'm wondering how hard it will be to find an apartment with limited funds (although my parents will help with the initial fees). Also, any suggestions for short-term jobs while I look for a permanent job?
Michelle Singletary: Well congrats to the soon-to-be grad. Wow how exciting. I remember those days before husband, rugrats, wrinkles....
Anyway with no job yet can you stay with parents until you get on your feet financially? If not, I would strongly suggest you think about getting a roommate. And depending on where you want to live you shouldn't have a problem finding a place, but getting something affordable is another story. A $1,000 in this area is not likely to get you into an apartment with first months rent and security deposit.
As far as a job not sure I can help you without knowing your background but you might want to try a temp agency.
College Park, Md.: I just graduated from college in December, and landed a good job with a tech firm in Northern Virgina. My question concerns 401k, and that is what is a typical percentage for the contribution to the 401k (I know it will depend on salary, but just want a general idea)? Currently, I put 3% in which is pretty low I assume.
Michelle Singletary:3 percent is low but how much you need to put in depends not just on how much you make but more importantly how much you think you will need in retirement (taking into account savings, any pension, Social Security, etc.)
Go to www.choosetosave and work thu the retirement ballpark calculator. That should help you figure out how much you need in retirement.
Atlanta: Hi Michelle,
Just wanted to point out some basic things that I (generally a pretty smart chick) didn't think of when I graduated college and started out on my own. I did a budget and thought I included everything so that when I negotiated my first salary I thought I had enough money, but...
-You have to kick in for your heath insurance. Also, doctor's copays, tylenol, cough syrup, etc. can get expensive fast, especially if you have allergies or something. You're not on your parents insurance anymore.
-Papertowels, kleenex, toilet paper, cleaning supplies, general household items, etc. cost money (even generic brands) and aren't going to be supplied by college housing or spilt with 10 roomates
-You have to dress for work, think clothing budget. Dry cleaning can get super expensive fast, so buy cotton or plan for it.
Seriously think through life and what you use on a daily basis and think about how you'll budget for it. It goes beyond rent, car, student loans, groceries, entertainment, and the normal things you think of first.
Michelle Singletary: Oh this is so true. I remember my first budget and I left out so much of the everyday things we use.
Washington, D.C.: Can I just share some advice with all the people just starting out? Do NOT go into needless debt. If you have accumulated debt through student loans, credit cards, etc., act NOW to pay them off however you can. Get a second job! I know working a full-time job will be hard enough, but do it now while you have no other obligations. It's really hard and tough to pull yourself away from a spouse, kids, grad school to work a second job later on when you could've taken care of that debt earlier.
Michelle Singletary: Amen!
My brother's keeper: Michelle, a friend died recently and I came face to face with the high cost of funerals. I have a brother who doesn't work full time and doesn't have any life insurance (or real assets, just LOTS of debt). I worry if something should happen to him---the rest of us would have to come up with $4-5K, or more, for a funeral very quickly. I am prepared to buy life insurance for him (for my peace of mind, really). Is this a good idea?
Michelle Singletary: I so know what you are talking about. I had to help pay for my brother's funeral. My grandmother did carry a small insurance policy on my brother. If you want to do that I don't think ok, especially if your brother is in poor health. Just get a really, really low cost term policy (he might have to take a physical and sign off on it).
Another route is to just save. If your brother is in good health just put a little away every month. That way if he lives long, you have the money to use for you.
Jobless grad: What about the poor roommate?
If you don't have an income lined up, it is pretty unwise to try and get your own place but it is downright scummy to get a roommate when you know your finances are shaky. Roommates aren't spouses or friends - they aren't obligated to support you when the chips are down.
Michelle Singletary: Now did I say get a roommate and without a job. Don't think so. I thought that was implied but guess I need to be specific.
Get a job and get a roommate. Besides I'm pretty sure most landlords will not rent to someone without a job.
Arlington, Va.:"Or for that matter, getting married before living together".
While I do appreciate your opinion on what is "proper", is it really the best financial decision for an engaged couple to each pay $1200/month for two apartments, when they are likely to spend most of their time together in one apt or the other anyway?
Michelle Singletary: It's not proper to live together in my book so yes, that makes that advice the best financial advice.
Sometimes you should ignore what is the cheaper thing to do in favor of what is the proper thing to do. I know in this day and age that's not the popular advice but the person did ask me and with me comes my opinions. And I don't mean that in a sarcastic way.
Arlington, Va.: To take stock my debts, I got my free annual credit report. To my surprise, I found 5-7 student loan and credit card outfits that check my credit every couple of months. The same ones send me free offers that I rip up when I check my mail.
Does this constant checking hurt my credit? And how do I track them down and tell them to stop? I googled some of these financial organizations and couldn't find a phone number.
Michelle Singletary: First those offers and the resulting look at your credit reports do not hurt your credit score.
Second you can opt out to stop those offers you get in the mail. Check this out from the FTC:
If you decide that you don't want to receive prescreened offers of credit and insurance, you have two choices: You can opt out of receiving them for five years or opt out of receiving them permanently. Call toll-free 1-888-5-OPTOUT (1-888-567-8688) or visit www.optoutprescreen.com for details. The telephone number and website are operated by the major consumer reporting companies. When you call or visit the website, you'll be asked to provide certain personal information, including your home telephone number, name, Social Security number, and date of birth. The information you provide is confidential and will be used only to process your request to opt out.
Remember that if you have joint credit relationships, like a mortgage or a car loan with a spouse, partner, or other adult, you may continue to receive some prescreened solicitations until both of you exercise your opt-out right.
Michelle Singletary: Well, I'm way over my time. Still lots of questions and many of them I'll answer in my electronic newsletter and in my print column so look for both (subscribe to the newsletter if you aren't now).
Take care and thanks so much for joining me today.
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