Stock investing for dummies
When I graduated college, I had my degree, but I didn’t feel prepared for the real world – especially when it came to my money. I thought my debit card was a credit card. I didn’t participate in the first 401(k) available to me because no one ever told me what it was.
I was terrified of the stock market after graduating in the middle of the recession. The term “financial literacy” wasn’t a familiar one, as it wasn’t a requirement at my college. And yet understanding finances is a life requirement.
Having made all those money mistakes early in my career, it feels ironic, yet fitting that financial education is my full time job. We all have a responsibility to educate the next generation; to ensure that young adults don’t graduate with the same lack of knowledge and confidence that I had. Now at work, I get to engage directly with college students.
Specifically, I run money workshops for college student groups and educate them on the topics that we call the “Five Money Musts”: budgeting, credit, debt, investing, and retirement.
Money Must #1: Budget
When I talk about budgeting, I refer to the 50/15/5 rule, which is a guideline on how to allocate your money each month: 50% on essentials, 15% on retirement savings, 5% on short term savings. And then the other 30% can be used other expenses. I like to use this “rule of thumb” versus tracking every cent that comes in and out – as that can become overwhelming.
As we all know, it’s likely there will be times when you spend more than you intended, and you don’t want hiccups here and there to completely derail your budget.
The best part of my job is when I see those “ah-ha moments” – the moment when I can tell something I’m saying clicks with the student. At one of my workshops at Boston College, a student raised their hand and exclaimed, “I get that!” She compared the rule to her friend who is always on a diet.
After eating healthy all week, she goes to a party on Friday night and cheats by eating a slice of pizza. And you know what she does next? She eats the whole pie, because in her mind she already messed up and will just have to restart her diet on Monday anyway. She let one misstep derail her diet for the entire weekend.
Money Must #2: Credit
So now I know that a debit card will not help me build credit, but what else is there to know? I often hear young adults are afraid of credit, as they assume it comes with going into debt. And the two don’t have to go hand-in-hand. Building credit wisely can affect your financial options in the future – giving you opportunities for the best rates when financing things like a car or a home. Here are three key things to remember:
- Always pay your credit card bills on time, and ideally in full each month. The “minimum payment” amount is a suggestion and you need it to pay in order not to incur a late fee, but paying in full means you’re not paying interest
- Check your debt load and ensure debt payments are less than one-third your income
- Check your credit report at least once a year; despite common misconceptions – this will not hurt your credit
Money Must #3: Debt
Managing debt is a two-part game – paying off what you owe and avoiding greater debt in the future. I remember a student from University of Cincinnati told me she’s helping her parents pay their mortgage. In addition, she had already accumulated significant student loan debt, and was working two jobs to help pay for college as she didn’t want to incur any more debt.
This ambitious and focused student already understood the concept avoiding even more debt, and was doing all she could to pay down what she had. But what about saving? She didn’t think she could start saving, too. When I explained some ways she could still pay down debt, but also save, she was grateful for the insights.
Here’s more on that concept – saving, while also ditching debt:
- Start at emergency fund. Work toward saving at least enough to cover three months of expenses.
- Contribute to your retirement – enough to get the entire match if your employer offers one to your 401(k) or 403(b) plans.
- Pay off high-interest debt, such as credit cards.
- Pay off private student loans.
- Bumping up your 401(k) contributions. Even if you’re still paying a mortgage, car loan, or government student loan, save as much as possible for retirement. Because these types of loans typically have a relatively lower interest rate, you may not need to pay them down as aggressively—plus some, like student loans from the government and a mortgage may offer some tax benefits.
Money Must #4: Invest
Investing can seem scary or complicated, but it’s one of the best ways to help reach long-term financial goals. Think about your life goals, could be renting an apartment, buying a house, buying a car, traveling, getting married, having a family, retiring, starting a business.
Then think about how long you have to save for them. Short-term goals are generally 0-5 years and may be more suitable to keep money in a savings account; while long-term goals are generally 5 years and more and may make sense to invest.
For those longer-term goals where it pays to invest since you won’t need the money for a few years, the important thing is to start early. Investing for the future can include investing in stock market with a diversified mix of investments.
Money Must #5: Retirement
When you get your first job out of college, retirement can seem far away and you likely have other competing priorities for your paychecks. However, saving for retirement from the first day of your first job gives you a big head start thanks to the magic of compounding returns.
Compounding is essentially what allows your money to potentially double and triple over many years. It begins when the investment earns a return that is then added into the investment. When those returns continued to be added to the investment, it can grow even more. The key ingredient is time.
Beyond compounding and time, here are four ideas to consider to give yourself a financial boost:
- Open an account so you have a dedicated place to start saving for retirement. If your job offers a 401(k) or 403(b) retirement savings plan – make sure to enroll. If these are not available to you, consider an IRA.
- Make saving automatic and build up your retirement without even thinking about it each month.
- Meet the match if your employer offers one to your 401(k) – don’t leave “free” money on the table!
- If you’re already saving, bump up your contributions aiming for a total of 15% of your pretax income (this includes employer contributions).
Whenever I think about these money musts, I wonder how I could have gotten through my undergrad and graduate programs without ever learning about these concepts in such a deliberate way. Instead, I had to live through my own money missteps – which of course learning through life experiences has its rewards, too.
Now, when I’m done leading a workshop, I have students tell me they attend these money workshops, but don’t expect to relate to anything. Instead? They leave realizing how much money touches every part of their lives – and the better prepared they are to manage it, the better position they are in to make the most of their future. And of course, continue to have fun in the meantime!
– stock investing for dummies