7/6/2012 6:18 PM ET|
Avoid your parents' money mistakes
Listen up, recent college grads: You can look forward to a brighter financial future if you stick to these 10 good money habits.
Since I'm not a best-selling author, film star or U.S. senator, I didn't give any commencement speeches this past spring. However, if I could stand up at the podium before an audience of eager, young college graduates, I know exactly what I would say.
I would tell them to thank their parents for their support. I would also advise them to live and work with both passion and purpose. But the bulk of my address would focus on the importance of avoiding the financial traps into which many adults, including some of their parents, have fallen. I would review my list of top 10 personal-finance habits for a successful financial future:
1. Create a budget
Keep track of your income and expenses. Create a budget and stick to it. How much are you spending on double lattes and other impulse purchases? These small income leaks add up to big dollars.
A $3-a-day coffee habit adds up to $1,095 a year, or almost 4% of a $30,000 annual salary. Get that habit down to $1.50 a day and you can put the $548 savings toward buying an iPad.
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2. Have a rainy-day fund
Before you buy that iPad, though, make sure you have enough money in the bank to cover living expenses for three months. Some 60% of adults do not have savings that can cover three months of their expenses. No rainy-day fund means you may be one job loss or medical emergency away from serious financial harm.
3. Pay off your credit cards
Pay off your credit card every month. You can purchase that new iPad right now if you use your credit card. The dark side, though, is the interest you will pay. If you make only the minimum $15 monthly payment on a credit card charging 18%, the iPad will take you 62 months to pay off, and it will end up costing $923 instead of $600 -- a 54% price increase. More than half of credit card holders carried an unpaid balance over the past year. Don't be one of them. (How long will it take you to pay off your credit cards? Find out with MSN Money's calculator.)
4. Pay your bills on time
One-third of all adults admit to not paying their bills on time. When you don't pay your bills on time, you negatively impact your credit score and can be subject late fees. A bad credit score will result in much higher interest rates on your debt: credit cards, auto loans and mortgages. Paying on time saves you money in the long term.
5. Don't spend more than you make
Once you get on the debt-financed spending path, it is very hard to recover. It's the fast lane to bankruptcy. More than 1.5 million people filed for bankruptcy over the last year. Avoid this road of debt and despair.
6. Be careful with your mortgage
Before the Great Recession, some people were using homes like ATMs. Homeowners refinanced or took out home equity loans to get cash. This is one reason a quarter of all homeowners are now "underwater," meaning they owe more on their homes than they are worth. Don't use your home like an ATM to buy new cars or go on vacations
7. Start thinking about retirement now
Know how much you need in savings for a comfortable retirement. You are not too young to take the time to calculate how much money you will need to save to live comfortably in retirement. Fewer than half of American workers do this. Don't be one of them.
8. Start saving for retirement now
Start saving for retirement when you are young. Some 60% of workers report that the total value of their household's savings and investments, excluding the value of their home and pension plans, is less than $25,000. Waiting till you're 35 or 45 to start saving is too late. The average Social Security individual benefit is less than $15,000 a year -- not enough for a dream retirement. (Are you saving enough for retirement? Use MSN Money's calculator to find out.)
9. Set your financial goals
Up to now, your goal has been graduating from college. Congratulations, you have succeeded. Now go out there and create some concrete financial goals such as paying off student loans, creating a rainy-day fund, putting money in a retirement plan and saving for a wedding, a trip, a car or a down payment for a home.
10. Learn about personal finance
To get here today, you have crammed and studied for many big final exams. Throughout your life, you will face many challenging personal-finance final exams. Will you pass? You will, if you become financially sophisticated.
As you join thousands of other young graduates heading off into an exciting future, I wish you good fortune and the knowledge and wisdom to successfully navigate the many financial decisions in your future.
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Those are all great. In order to stick to them, I would recommend going debt free. Know what the difference is between a want and a need. If you don't have the money for a want, save and pay cash.
If you really need something and don't have the cash, pay off the debt immediately. Continue to live off of the current budget you had before you graduated and use the extra money to pay off your debt. You will be a lot happier in life if you do these simple things.
I would add: be careful as there is a continuous effort to get your money by unscrupolous market gurus with multi-million advertising campaigns that make their product look like solid gold. But all of a sudden, there you are naked in the middle of the street with nothing on but your mother's blessing.
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