By Jeanette Pavini, Marketwatch Wall Street Journal
I’m a parent of a college student who will be tossing his cap in the air this year. And like many other parents out there, I wonder: Did I really teach my son the value of a dollar? My parents instilled in me the value of every penny, but I question whether I passed that gift along.
It’s critical that our kids have an understanding of how the world of finance works, and that a debit card isn’t a source of endless cash. Even if our college students graduate with a 4.0 grade point average, do they really possess the financial savvy needed in the real world?
Here are a few lessons to pass along to college grads to ensure they have all the tools needed to officially enter the world of adulthood and finance—especially when it comes to keeping up with their bills and building a good credit history.
Check your credit report
Grads should know they are entitled to a free report each year from all three of the credit reporting bureaus. If it’s their first time accessing credit reports, then they may want to get all three at once so they can make sure everything is in order. But in future years, it may be good to spread them out, one every four months. That way they can periodically look for any red flags, rather than only getting that opportunity once a year. Go to AnnualCreditReport.com to get free reports.
Don’t assume that just because a student never opened a credit card, there is no need to get a report. When new grads try to rent an apartment or even apply for a job, their credit may be checked. So, it’s important to know what’s on there, especially if there is an error that needs to be disputed. In fact, some identity thieves target children because they know it’s likely that they and their parents are not monitoring their credit history regularly—which could mean they could go years using the identity before the fraud is detected.
Build a credit history
Simply having nothing negative on your report is not enough to get good interest rates, secure a top-rated credit card or impress future landlords. But that doesn’t necessarily mean it’s time to open up a credit card account, according to Lance Roberts, Chief Strategist at STA Wealth Management.
In fact, doesn’t think it’s necessary for recent graduates to immediately have credit cards at all. “You don’t need a credit card to build credit,” he says. “When you rent an apartment, you build credit. When you buy a car, you build credit. The truth is grads don’t need credit when you pay for everything in cash. Outside of a mortgage for a home everything else should always be saved for and paid in cash.”
Of course, many graduates are using a credit card already. If it’s a card geared toward students, then it might be time to reassess. Often these cards focus on building credit, rather than offering the best rewards. So it may be time to “graduate” from a student card to one that offers better perks like cash back. The trick here is to make sure to not get caught up in the allure of earning reward points and end up in debt. No matter what age, people who are not able to pay off their credit card bill every month need to be very careful. If someone falls into this predicament, they should consider cashing out their rewards and putting it directly toward the amount owed.
Manage student debt
Grads with outstanding student loans need to quickly learn to live on less than they make. “They should immediately pay off student debt before starting to save for anything else,” says Roberts. “Grads can achieve this by putting 30% of their income toward student debt,” says Roberts.
Build a cash cushion
When the debt is paid off, it isn’t time to start spending. “It is then and only then that grads should look into saving for a 6 month emergency fund and keeping that in cash,” says Roberts. “Once a grad builds that fund, they should then look into saving for retirement. My suggestion is that the 30% of their income [they were applying to student loans] goes into saving for retirement using a 401k first, then a Roth and any excess into an investment account.”
Start a (cheap) stock portfolio
While many of us are thinking about buying recent grads a blender or a briefcase, Vita Nelson, co-manager of MP 63 Fund (DRIPX), says you may want to think about giving grads a gift with long-term potential.
“A good way to launch a graduate into the world of saving and investing is by giving a share of stock and enrollment in a dividend reinvestment plan (DRIP),” says Nelson. “Even better, you can give a share of a few companies so your grad will have a diversified portfolio.”
“We are in an economy where graduates don’t simply get handed a diploma and start their career the next day. With DRIPs they can be empowered to begin a program to reach their long-term financial goals even if they have only small amounts to invest.”
Ask for advice
As graduates start the new task of trying to find employment in their desired field, many of their parents will try to continue to help them financially.
A friend of mine had a good process of helping his daughter through the transition of graduate to an employed graduate. Rather than just give her money to help cover her expenses while she was looking for a job, she would come over and they would pay the bills together. If there was a discrepancy on a bill, she would call the companies, with her father’s guidance.
So even though he was helping her, he also taught her the responsibilities that come along with paying bills. I wish there were more classes on this in college.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Gerber Kawasaki Inc, a registered investment advisor and separate entity from LPL Financial.