New graduates, you are our future and we want you to be happy and financially secure. I talked last week about the value of balancing income and spending and preparing for emergencies. This week, I’ll cover credit and investing.
If we ask why you think a credit card is necessary, most of you would say, "For emergencies." If we probe further, most of you would ‘fess up to using credit cards for clothes, food and other fun things, and that’s when trouble begins.
It doesn’t take long to accumulate thousands of dollars in credit card debt by making what seem like small purchases. When I graduated, revolving credit was not common. I had a pay-in-full-each-month credit account at the department store where I worked. For recreation, I spent most lunch hours browsing for bargains, but it wasn’t long until I had more debt than I could pay off with my monthly pay. I switched to a revolving credit account and I paid those accounts off just as soon as I could. Learn from my mistakes that bargains can quickly added up to an unmanageable debt. In the beginning, use credit only for emergencies to blaze a clear path into a financially reliable future.
Investing is interesting and you should start learning right away. The disappearance of Enron employee retirement plans, for example, means that you may have to accept more responsibility for your company retirement plan. Instead of having a large portion of your funds in company stock, you will need to diversify all retirement and investment funds so the loss of one account won’t derail your entire retirement portfolio. This means learning as much as you can by reading, watching financial programs on television, taking classes and consulting with a financial professional who can help you make financial decisions.
Learn about Roth individual retirement accounts, or IRAs. When you are 59½ years old and eligible to spend your IRA money, you won’t be taxed. If you need to borrow from yourself earlier, you can take out the money you invested (not the earnings) without paying tax or a penalty. But pay it back as soon as you can – it’s your retirement.
Learn how to do a net-worth statement. You’ll be proud of your progress and it will motivate you to keep up the good work.