College students take a lot of heat for being poor money
managers. But I'm convinced that all it takes to sharpen their
skills is a little knowledge. I've reached that conclusion after
years of working with summer interns here at Kiplinger. Each year,
we get a new crop of bright young college students who know almost
nothing about personal finance. And let's face it, reporting and
writing about things such as mutual funds and 401(k) plans doesn't
sound very glamorous. But when I ask them how they enjoyed their
summer, I'm invariably impressed by how much they've learned -- and
taken to heart.
SEE ALSO:
Our Personal Finance Advice for New Grads
Emily Inverso, who's starting her senior year at Kent State
University, says the most valuable takeaway for her was that a Roth
IRA is an option even for college students who work part-time (see
Why You Need a Roth IRA
). "A retirement account always seemed to be something that
accompanied a full-time job. But this summer I learned that
retirement investing is attainable for someone like me, as long as
I have earned income," says Emily. "It almost seems silly not to
start investing now. After all, compound interest is a beautiful
thing."
Surprisingly, retirement was also top of mind for David Marten,
of Cornell University. While researching stories, David discovered
target-date funds, which, in his words, "are useful for people who
don't have the time and don't want to make the effort to manage
their portfolios by themselves -- myself included." (See
Investing in a Target-Date Fund
.) Says David, "If I were to invest in a fund that matured when I
was ready to retire, say in 2060, the assets in the fund would be
heavily geared toward stocks, so I stand to get a decent return
over such a long period."
Neither David nor Emily has any qualms about investing in stocks
-- noteworthy in light of studies showing that young people were
particularly burned by the most recent bear market and are shying
away from the stock market. But right now, Emily's top priority is
saving up her money to pay for a move to a "sizable city" after
graduation.
Kaitlin Pitsker, who graduated from Syracuse University, is also
watching her budget so that she can periodically pay an extra $50
or $100 toward her student loans. In fact, Kaitlin has created a
spreadsheet in Excel to calculate an amortization schedule for her
loans that shows how much an extra payment now will save her later
on. Says Kaitlin, "That's a great motivation to find extra money in
my budget and not use it to splurge."
Based on the experience of my Kip "focus group," here's my best
advice for students going off to college this fall:
--
Stay on top of your student loans
so that you don't get in over your head. Even if you don't set up
an amortization schedule, at least figure out how much it will cost
you to repay the loans based on the starting salary you expect to
make (see
Avoid the Student Loan Debt Trap
).
--
Keep track of your money
using pencil and paper or an online money-management tool so that
you can cover your expenses without overdrawing your account (and
have enough to finance a post-graduation move). Even though many
banks have increased their fees, I still think debit cards are the
best way for students to learn how to manage their money (see
How to Teach Kids to Handle Credit Cards
).
--
Take a pass on credit cards.
Studies consistently show that college kids struggle with credit
card debt. One recent survey of undergraduate business students
published in the International Journal of Business and Social
Science found that 90% of student cardholders carried a balance
from month to month, and fewer than 10% knew their card's interest
rate or what they would be charged if they made payments late or
went over their limit. To avoid the debt trap, students should
forgo cards at least until they're ready to graduate and have
acquired several years of experience and confidence managing their
cash.
--
Start saving now.
Any money earned from a summer job or other work can be contributed
to a Roth IRA. In 2012, the contribution limit is $5,000 or the
amount of your earnings, whichever is less. And if kids need their
money to cover college expenses, parents can kick in the equivalent
cash. As David observes, "the earlier you start saving, the better
off you'll be."
Follow Janet's updates at
Twitter.com/JanetBodnar
.