Grad Guide 2007: Click for special section.
Transcript: Wednesday, May 2, 11 a.m. ET

Money Management for Young Workers

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Daniel Frank
Author, "So You Graduated College: A Financial Guide to Life After Graduation"
Wednesday, May 2, 2007; 11:00 AM

Daniel Frank, author of "So You Graduated College: A Financial Guide to Life After Graduation" (Keystone Enterprises, 2006), advises young professionals on how to achieve financial success in the 'real world.' From buying your first car to renting an apartment to paying for grad school, Frank covers a wide range of topics.

The transcript follows below.

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Washington, D.C.: How early should you start contributing to your 401(k) plan? I just recently became eligible and am 24-years-old.

Daniel Frank: It depends on a couple questions. First, does your employer match contributions? Many employers will match each dollar you contribute to your 401(k) with anywhere from fifty cents to two dollars. Assuming your employer does match, what is their matching limit? Most employers that have a 401(k) matching program will cap the amount that they are willing to match at a certain dollar amount or a certain percentage of your salary. If your employer does match contributions, you should definitely contribute at least up to the matching limit. Even at the low end where an employer matches each of your dollars with only 50 cents, you are still receiving an instant 50 percent return on your money. Even if you need to withdraw that money from your 401(k) prior to retirement, which results in a 10 percent penalty, you're still much better off by making the contributions.

If your employer does not match contributions, the rewards for participating in the 401(k) program are not as significant in the short term but you are still receiving a tax break and the long term benefits of tax free growth can be substantial resulting in tens of thousands of additional dollars. Therefore, I would urge you to contribute regardless of employer matching as long as you can still make ends meet and do not have a need for substantial funds in the near future.

However, if your employer does not match, I would suggest that you first contribute up to the limit (currently $4,000) into a Roth IRA before contributing to your 401(k).

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Anonymous: I got caught up in credit card debt right after college. I currently am about $8,000 in debt, with a pretty high interest rate. I'm committed to paying it off, and want to know if there's a best way to go about trying to get my rate reduced.

I work full-time and am in graduate school, and my take home pay is about $2,500/month.

Daniel Frank: Read the sample page from my book found at the following link: http://www.soyougraduatedcollege.com/pages/sample%20pages/Ch5.html

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Bowie, Md.: When young workers ask a financial expert whether my priority should be saving for retirement, saving for a house, or building a cash reserve (emergency fund) the most likely response is "do all three." Fine, don't spend anything is probably the best financial advice.

However, there are some experiences worth having at a young age that will never occur after kids and middle age set in. Is there anything that's so worth doing in your 20s that if you want to do it ever, you better get it out of the way, and just accept the financial lumps?

Daniel Frank: Yes, definitely! But what those things are is completely up to you. Don't forget that the point of personal finance is simply to facilitate a good life (not just a good retirement). The trick is to prioritize your expenses and not waste money on things that you don't care about. I've always made a point of being extremely frugal on things like food (you'll never catch me drinking anything but water at a restaurant) but I spend my money rather liberally on vacations and other social or sporting activities.

So yes, you should still spend money on your passions when you're young. Just be aware of the lost savings and potential investment growth that you are passing up and as long as it's worth it to you, then by all means, go have fun with your money.

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Washington, D.C.: What's the best advice you can give a kid just out of college and about to get their first job in terms of starting out on the best financial footing?

Daniel Frank: First off, as long as you don't need the paycheck ASAP, be picky with your job and don't be afraid to quit. This isn't the advice that parents want to hear, but the reason I say this is that I see far too many people go down a career path with no real passion just because it's where they started off. Trust me, once you've spent several years in a field and are making decent money, it's really tough to switch careers - unless it's in a related industry, you will likely fall a few notches on the totem pole. Save yourself this dilema and think hard about your first few jobs.

As for starting off on the best financial footing, move back in with the folks. Seriously -- free rent, free food, free utilities -- it really adds up!

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Washington, D.C.: Why should I invest in a Roth IRA? I would like to open one, but don't know much about what investments to pick.

Daniel Frank: In a Roth IRA, you pay taxes on your income now, but the money is allowed to grow tax free. The investment growth potential is tremendous over the long term. For example, over a 30 year timespan, $4000 would turn to $18,303 if invested in a standard taxable account at 8%. However, if you invest the $4,000 in a Roth IRA instead, it would turn into $40,251 over the same time period. This is a huge difference!

As for which investments to pick, I would go with riskier stuff when you're young becuase risky investments over a long time period aren't really that risky because you have time to go through the ups and downs of the market. That being said, stocks are the way to go and I would look at Vanguard or Fidelity's index funds. An index fund simply invests in every stock in a given index (such as the Wilshire 5000) and therefore gives you a very diversified portfolio at minimal costs. Do a google search on "Index Funds" or look on Vanguard or Fidelity's Web site to learn more.

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Washington, D.C.:"As for starting off on the best financial footing, move back in with the folks. Seriously -- free rent, free food, free utilities -- it really adds up!"

I don't know if taking financial advice from someone who encourages mooching off of parents is a good idea. Why not teach them to find CHEAPER rent. Live with roommates? Anything but regress in the quest for independence? Besides, living with the parents can really kill the love life.

Daniel Frank: A good point, but also a personal preference. Like most things in personal finance, there is no perfect answer. It truly depends on each individuals personality and individual situation. And "mooching" may be a slightly negative word to describe it. Many parents are delighted to have their recent grads move back in for a year or so while they save money.

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Saving account vs. investment account: I want to have savings for emergencies, but I also want long-term savings for very distant goals (like five to 10 years) and would like to invest. Good idea or no? If I had say, $250/month to use for either or both of these accounts, what should I do? In full disclosure, I have $0 in either account, but do contribute the max to IRA and full matching amount to 401(k).

Daniel Frank: Yes, a good idea. You should always have a little money set aside for emergencies, but you definitely also want to invest for the long term.

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401(k) advice...: I disagree. You can save much more via 401(k) as opposed to an IRA whether or not the employer matches and the money is pre-tax dollars, which reduces their taxable income.

Daniel Frank: True, but I believe I said to invest in your Roth IRA before investing in your 401(k), not to invest in the Roth rather than the 401(k). Also, recent grads are assumably earning less money and paying less taxes now than when they are older, so a Roth (where you pay taxes now, not later) is arguably preferable to a 401(k) (where you avoid taxes now, but pay them later).

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Woodbridge, Va.: I have about $14,000 in student loans which I have started to pay (always on time, extra, etc). I have an older car which I hope is going to last for another year or two. Should I wait and possibly miss out on the college grad deals that you can get (most will offer special financing for college grads out up to two years) and focus on keeping my debt relatively low or should i bite the bullet and put myself an additional $14,000 to $16,000 in debt?

Daniel Frank: I'm not familiar with the recent grad car specials, but one thing I've learned about purchasing a car is that there are always deals to be had -- especially as the dealer attempts to clean out the prior year's inventory.

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Rockville, Md.: In a high-cost metro area (like Washington) my own opinion is that no one should buy a home unless they think they're 80 percent likely to stay there at least five years. The point being not that 75 percent for four years doesn't cut it; but that real estate transactions are expensive and should always be long-term investments.

Your thoughts?

Daniel Frank: I definitely agree. People think that you should always by a house as soon as possible because after all, it's real estate -- it always goes up! This is a dangerous mind frame though (especially in today's market) and if you decide to move a year or two down the road, you're right, the transaction costs are huge.

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I just read something that I'd like your thoughts on ...: It said the rather than focusing on career planning, you should focus on financial planning. It argues that "the best preparation for a professional life is to make choices that prepare you for the most possible careers." The premise is that if you always have your financial house in order, you are then prepared for those career bumps that come along the way -- layoffs, downsizing, leaves of absences, career changes. What do you think?

Daniel Frank: I agree. The nice thing about financial independence is that it gives you the ability to do whatever the heck you want. If you don't need the paycheck, you have much more freedom to experience life exactly the way you want to.

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Fairfax, Va.: Are you familiar with Tamara Draut's book, "Strapped: Why 20 and 30-Somethings Can't Get Ahead"? If so, we are curious what you think of her argument that young people graduating from college are burdened with crippling debt; good starter jobs are scarce and everything else, such as housing is out of reach. This generation may never have the same lifestyle as their parents, she argues. Are you more optimistic?

Daniel Frank: I am more optimistic. Perhaps today is a financial struggle for young adults, but the economy, the housing market, and the job market all move in cycles, meaning that there will be an upswing again at some point in the near future.

Crippling Debt: Yes, debt can be crippling, but the optimism here comes from the fact that it's up to you whether you get into debt or not. Limiting debt through frugal living is extremely important to financial success. The Job Market: Any lack of opportunities for young adults today has to be temporary in nature. As older employees retire or get promoted, positions must be filled. Do you expect your 60-year-old CEO to be running the company in 20 or 30 years? Probably not. By definition, the youth are the future, and so there will always be potential for career advancement over the long term. Housing is out of Reach: The recent housing boom has resulted in an out of whack housing market which needs to endure a correction period where prices will either fall or at least remain relatively stable for some time as income and inflation catch up. It won't be out of reach forever. If nobody can afford to buy houses, the prices must fall until they become relatively affordable again. There have already been significant signs in the housing market suggesting that such a correction period is currently underway.

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RE: Roth: But even if you're in a high tax bracket now, $4,000 after-tax dollars is a lot more than $4,000 pre-tax dollars.

Daniel Frank: True, but it all works out in the end. If you'd like to send me an email at dan@soyougraduatedcollege.com, I can send you a more detailed explanation of why the Roth makes more sense later on today.

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RE: Mooching: I think it's fine to live with your folks as long as you are saving the money you would otherwise spend on rent. If you don't do this, you'll probably get used to a lifestyle you can't afford -- with all your pay going for food and fun and toys.

Daniel Frank: An excellent point. The longer you prolong an expensive lifestyle, the better. Once you move up in quality, it's hard to go back down. I was happy with my old beater of a car in high school and college, but now that I have a new 2006 car, I couldn't go back to that old thing.

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Pentagon City, Va.: I think I have it pretty much together. I'm 28, make about $80,000 max out contributions to my IRA and 10 percent to my company savings plan. My only debt is student loans and car payments. Now I'm starting to think about buying a condo. This book is more focused on recent grads - but is there something else that you could recommend for the younger crowd about buying your first condo. With prices going down, it seems like the perfect time, so I want to start doing my homework! Thanks!

Daniel Frank: As someone else mentioned, I would recommend that you first make sure that you are going to live there for at least a few years if not several. You're 28, so you may have more stability in your life than a recent grad. My guess is that the market is starting to go down, but there's still a ways to go. We really are at an unprecedented high in real estate prices and housing inventory.

As for being prepared, I think most people go into their first home purchase sweating bullets, and that's fine. The only way to truly learn many things is simply by doing them. The realtors will walk you through most steps anyway, but it is a good idea to do your homework - I would particularly focus on negotiation skills rather than the details of real estate transactions.

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Arlington, Va.: Thanks so much for doing this chat! I know there are a lot of people out there with questions about finances with no where to turn. I recently finished my undergad and am attending Grad school at a rather expensive university (completely on loans) while working full time. While I make a decent amount for my first job out of college, I am beginning to fear graduation and the impending student loan payments that will be thrown at me following it. In the next year that I have no loans to pay off, how much would you recommend I be saving (and how do I save it) in order to not be overwhelmed when it's time to start paying up?

Daniel Frank: I don't know the details of your debt, but the nice thing about student loans is that they are typically at extremely low interest rates with favorable repayment terms, so the urgency to repay them is not as significant as it is with credit cards and certain installment loans (e.g. appliance loans).

Without knowing more details about your financial situation, it's hard to say how much you should save. But as for how do you save it ... this depends on you. If you have plenty of discipline, just set aside a certain amount in a money market account or other high yield savings vehicle. I like to use automatic transfers for this purpose. If you're afraid that you might use that money for an unintended purpose, consider opening a 529 plan, which is essentially an educational IRA -- the account can only be used for educational related expenses.

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Fairfax, Va.: Would you recommend putting savings in one of those high-interest online bank accounts?

Also, I have $20,000 in student loans and am graduating (from grad school) soon. Interest rate around 4.5 percent. Should I be interested in paying it off ASAP, or go with the minimum or low payments for many, many, many years?

Daniel Frank: Depends on the dollar amount you have to invest. If it's minimal, the high interest rate isn't worth the hassle (at least in my mind), but if you have a decent chunk of cash sitting around, then sure -- the rates are quite attractive.

Personally, I never bothered, simply because I don't keep much money in cash/savings accounts. Any amount that I don't need for day to day life, I move to my brokerage account and invest it - but what you do is totally your prerogative.

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Dupont Circle, D.C.: I have about $60,000 in student loans from graduate schools. I graduated and consolidated a few years ago, when interest rates were low: 2.875 percent. Though I have no other outstanding debt, I've been taking my time to pay it off (about $255/month, though I can contribute more) simply because the interest rate less than inflation. Is this the right approach, or should I try to pay it off as soon as possible? I'm thinking about using my money to invest or save up for a down payment on a home. Thanks!

Daniel Frank: I'd borrow at 2.875 percent all day long. I think you're doing the right thing by paying it off as slowly as possible. You can keep that money in an online savings account and being making a guaranteed profit from your borrowed money.

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Burke, Va.: Correct me if I am wrong, but a ROTH IRA principal (i.e. the amount that you paid in) is withdrawable penalty free in case you need the money later. Also, isn't the total amount withdrawable for a house purchase or educational expense?

Daniel Frank: There are certain limitations on such withdrawals, which I don't have off the top of my head, but in general, yes, you are correct ... another point in favor of the Roth!

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Washington, D.C. : Is it wise for recent grads to begin investing in stocks/mutual funds etc? How much do you think is a wise amount to invest and how do you go about it?

Daniel Frank: Depends on your risk tolerances and personal situation, but in general, yes, I do think it's wise. I would buy index funds through Fidelity or Vanguard. As for how much, it's up to you, but I am always a big fan of maximizing investments. Check out the following link to see how beneficial investing at a young age can be. http://www.soyougraduatedcollege.com/pages/sample%20pages/Ch11.html

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Washington, D.C.: I have to say I find it interesting that many folks my age (30) earn so much money. Granted I work for a nonprofit and don't make what I could elswehere, how do I go about saving for retirement, a house, a rainy day and still have living expenses? Do you have any books to recommend to read about general financial planning? All these terms of ROTH IRAs, etc., has me a bit confused!

Daniel Frank: Of course, I'd have to recommend my book: So You Graduated College. It will talk about all you mentioned and more. It is a quick read that doesn't waste your time with useless finance information. Then, what I'd recommend is simply doing Google searches on any topics or terms in the book that you'd like to learn more about.

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