Sitting in the front row were two athletic soon-to-be college graduates, eager for corporate, game face and all. A serious and focused young woman in her 20s, adjacently positioned, never stopped making eye contact with me or taking notes in the Giovatto Auditorium.
This was an event hosted by the Business Leaders of Tomorrow at Fairleigh Dickinson University in Teaneck, NJ. An active and engaged group of student leaders ready to take on the world, representing the next wave of millennial entrepreneurs, global business and finance professionals, and tech superstars defining the evolution of a connected economy.
Judging by the lay of the land, putting the cell phone away was clearly a battle I would not win during my presentation. As a matter of fact, I didn’t even try.
“How many of you remembered to bring your cell phone to class?” I asked rhetorically and saw all hands shoot up. “Excellent, let’s get started then!”
I fired up my PowerPoint, which was preloaded with text message (SMS) polls, an audience response system that uses mobile technology to display answers in real-time. It works like this:
The next thing I knew everybody was on their phone. Text questions from students, verbal ones too, were continuously populating the screen! The one I liked the most, “What financial lessons would you teach your younger self?” Taking a moment to pause I said, “Saving for retirement and negotiating for starters. But I’ll tell you what, we’ll write about it!”
And so we dedicate this blog post to the aspiring young scholar in the room who had the courage to ask her question—aloud.
1. Save for retirement in your 20’s.
The earlier you start saving for retirement the better, thanks to the magic of compound interest, interest that is paid both on the original amount of money and on the interest it generates. Albert Einstein, the genius behind the world’s most famous scientific equation E = mc2 called compound interest “the strongest force in the universe.” Bottom line, the timing of your investment is more important than the actual amount so do it in your 20s, when it has more time to compound. For example, $1,000 earning 10% yields $100 in interest. The next period, you add that to the principle ($1,000 + $100) and get $1,100, which now earns $110 in interest, and so on.
2. Learn about investing early.
The best way to learn about money, stocks and bonds, and investments overall is to own them. Nowadays, beginners can even use a stock simulator to get their feet wet in a virtual environment before risking their own capital (yes, all investments carry risk). Many of these online simulators, such as Investopedia’s Beginners Only Game , are free to use and include tutorials that can help build confidence and knowledge, introduce concepts like trading and short selling, and explain various fundamental and technical analysis. Having first-hand experience will position you for future success as a knowledgeable and well-informed investor.
3. Drive the clunker longer.
Resisting the temptation to trade in the clunker is cheaper and better in the long run. Think about how much faster you can pay down your debt without having to pay a monthly car loan or lease payment, usually three to four years on average. Life without a car payment can also do wonders for the rest of your college expenses, not to mention your emergency fund, retirement account, or investment account. Another option is to build up enough savings for a larger down payment, which means having to finance less money, and a lower monthly loan or lease payment.
4. Only work for companies that offer a 401(k) company match.
Some employers match part or contribute a certain amount to your retirement savings based on the amount you contribute. An employer match is the equivalent of free money, compounding annually, potentially adding thousands towards your retirement plan contributions. A typical match is 50% of employee contributions for the first 6% of salary. These funds also grow tax-free until they are withdrawn, beginning at age 59 ½ without penalty. With full retirement age escalating higher to age 67 for those born 1960 or later, starting a 401(k) early in one’s career is key later in life.
5. Pay attention to ATM fees.
Automated teller machines are notorious for charging hefty fees on consumers who use ATMs to withdraw cash. According to Bankrate.com, the fees for using a bank’s ATM when you’re not a checking account holder at that bank jumped 4% to $2.88 per transaction last year alone. To make matters even worse, additional fees called surcharges, are also imposed on consumers who use ATMs by other banks outside their network. A recent Wall Street Journal survey finds an average cost of $4.52 for out-of-network withdrawals. Don’t say I didn’t warn you - ATM plus surcharge fees can quickly escalate to hundreds of dollars if you’re not careful!
6. Start a 529 college savings plan.
The cost for education is at an all-time high, with no relief in sight. Starting the accumulation phase early means more money will be available at the start of the first tuition bill. But the decisions of where to save and how to save can work in your favor using a tax-advantaged savings plan known as a 529 Plan. Nearly every state offers at least one type of 529 plan: a saving programs or a prepaid program—you can invest in a 529 plan from another state different from where you live. The main tax benefit has to do with earnings (not contributions) which grow federal tax-free. They will not be taxed when the money is used to pay for “qualified” educational expenses such as tuition and fees, books, supplies and equipment. Also, 529 plans allow for change in ownership and can be easily transferred to a sibling, parent, or another member of the family.
7. Purchase term insurance over whole insurance.
For most young people and growing families, term insurance is a far better and less expensive option than whole life, especially when cost is a main issue or coverage is needed for a specified period of time. Term insurance provides immediate but temporary coverage for a lower premium compared to whole life. While whole life policies build cash value, assuming premiums are paid and certain conditions met, they are more expensive. In my case, I would have been better off purchasing term insurance and putting those extra dollars to work in a retirement account such as an IRA or Roth IRA.
8. Obsess over credit score and APR.
Your credit score is the first line of defense when it comes to securing a personal loan for an automobile, apartment, or the purchase of a home. The better your credit score, the lower the interest rate. Conventional mortgage loans usually require a FICO credit score of at least 740 to get the lowest mortgage rates and fees. With that said, the younger you start to monitor and raise your credit score the cheaper the costs to borrow. How do you maintain a high credit score? Paying credit cards off in full each month while avoiding cards with high interest rates, such as retail credit cards which carry excessive APRs (annual percentage rates), 23.23 percent on average according to survey data from CreditCards.com .
9. Learn the Rule of 72.
There’s a very easy mental math shortcut to figure out how long it takes an investment to double in value I wish I knew about back when. This shortcut is called the Rule of 72. It’s a useful skill to have when you’re young because it can put things in perspective. The rule says in order for you to find the number of years required to double your money, divide that interest rate into 72. For example, if you want to know how long it will take you to double your money at six percent interest, divide 6 into 72 and get 12 years. The Rule of 72 can also be flipped around! If you want to double your money in 6 years, divide 72 by 6 and you will need to earn 12%.
10. Negotiate everything, including more money.
My younger self didn’t give much thought to negotiating, only finding a job. Today’s graduates find themselves in a similar circumstance, lucky to land a job right out of college and earning a regular salary. Sixty percent of today’s millennials don’t negotiate salary when receiving their first job offers either, according to payscale. com . So the million dollar question, “should I take the leap and try to negotiate or play it safe and keep quiet?” It depends. If you don’t ask you don’t get. So if you’re ok with that, then proceed. However, I can tell you from personal experience, that negotiation is a skill necessary if you wish to elevate your status to that of a top performer, in fact it’s expected. Employers will be looking for you to be able to articulate the value you bring to their organization and spell out “here’s what I am going to do” before they entertain any salary adjustment. Consider other rewards such as a better title, tuition reimbursement, flex and vacation time – all which have a positive net effect on your future.
11. Ask deeper and more questions.
There is an old Chinese proverb that goes like this, “He who asks a question is a fool for five minutes; he who does not ask a question remains a fool forever.” It is a powerful reminder of the importance of asking questions, especially for college graduates hoping to master an area of study and ultimately make that grand leap of faith from academics to the real world. Remember back in grade school when you learned the Pythagorean Theorem for the very first time? Most of us just didn’t get it. In spite of the potential embarrassment we raised our hands, asked questions, went for extra help, and even earned a high grade. Let's not forget that asking deeper and more questions is fundamental to growth; it is a sign of strength, not weakness. Just ask the students of BLT.