If you’re like most American adults, you probably have no idea what you’re doing with your money. Let’s remedy that.
Fall is in the air, and that means it’s back-to-school time. Only you’re not going back to school because you graduated. Instead, you’ve got your first job – congrats! (And probably also your first student loan payment – condolences!).
You’re now a certified American adult, which means you’re probably pretty close to financially illiterate.
Plenty of research shows Americans are less than savvy about managing their money, including work by Annamaria Lusardi of Dartmouth that was recently highlighted on the Freakonomics blog. Some of the more alarming findings include:
- The majority of Americans do not plan for predictable events such as retirement or children’s college education.
- People do not make provisions for unexpected events and emergencies, leaving themselves and the economy exposed to shocks.
- While managing debt, Americans engage in behaviors that can generate large expenses, such as sizable interest payments and fees.
- People aren’t well informed about their terms of borrowing; a sizable group does not know the terms of their mortgages or the interest rates they pay on their loans.
- The majority of Americans lack basic knowledge of fundamental economic principles such as the workings of inflation, risk diversification, and the relationship between asset prices and interest rates.
So as you take your first few financial steps, how can you avoid some of the more gruesome mistakes studied by Lusardi?
Lots of sites offer tips for career newbies and recent grads. Much of the advice you’re probably sick of hearing; yes, you know you should try to max out your 401K contributions if your company is matching them, and no, running to Starbucks twice a day isn’t the best for your budget.
But these crucial tips will really save you the embarrassment and expense of behaving like financial illiterate:
Fight lifestyle inflation. Most college kids don’t have a ton of spending money, thus the image of subsisting largely on Ramen noodles.
Now that you’ve graduated and (hopefully) gotten a job, you’ll probably feel the impulse to celebrate by releasing the purse strings and splurging a bit. Sure, you should celebrate your new job and, by all means, never eat Ramen again. But don’t relax about money so much you end up saving nothing or not thinking carefully about financial goals.
This might feel like the end of a long road, but it’s really just the beginning.
Don’t wait to hit up your parents for health insurance. Thanks to Obamacare, you can now stay on your parents health plan until you’re 26, making it much less of a knuckle-biting stressor if you’re not covered by work.
But that doesn’t mean you shouldn’t sweat insurance. “If students have been covered by the college health plan and want to get onto their parents’ insurance plan, they have 30 days from the date their student coverage ends to do so. Miss that window, and they may be left out until the plan’s next annual enrollment period, usually at the beginning of the new year,” says NPR’s Shots health blog.
Better call mom then, huh?
Don’t be tempted by your retirement pot. You’re in your 20s, so of course retirement feels eons away. It might be tempting to dip into whatever retirement savings you have to pay for a short-term expense like tuition or credit card bills, but that’s almost always a bad idea.
Writing on Lifehacker, Melanie Pinola shares her regret: “Trading long-term financial growth to solve a relatively small problem like credit card debt definitely falls into the dumb money mistake heading. In addition to losing valuable investment growth over those years, I got hit with a pretty hefty 10 percent early tax withdrawal penalty. Taking money out of your IRA (if you’re going to be hit with that penalty) is really a last resort.”
Start saving. When it comes to personal finance, half-baked action beats much-delayed mastery, so even if you can’t reel off all the differences between a Roth IRA and a traditional one or aren’t sure what percentage of your portfolio to allocate to bonds, start saving. You can figure out exactly what to do with the money (plus compounded interest) later.
Finally, take advice. You may have learned a lot in college, but personal finance is one area where you’re still almost certainly a newbie. Lecturing on this issue may sound like fingernails on a chalkboard, but not having the money to make your dreams a reality is far more painful.
There are a ton of free resources out there. Consult them.
What’s the dumbest financial mistake you’ve ever made, and how can your fellow grads avoid it?
Jessica Stillman is a freelance writer based in London and is the author of BNET’s Entry-Level Rebel column.