“You have brains in your head. You have feet in your shoes. You can steer yourself in any direction you choose. You’re on your own, and you know what you know. And you are the guy who’ll decide where to go.”
– Dr. Seuss
“You’re on your own, and you know what you know.” I have three sons, and I wonder: What do they know, and do they realize what matters most about their financial lives? Do they know what a credit score is and the impact it can have on their job prospects, ability to rent an apartment and likelihood of getting a car or home loan? Do they know anything about the time value of money—the idea that a dollar today is worth more than that same dollar in 20 years? Do they know anything about how quickly money can grow without any “work” on their end just by saving (and investing) regularly? (This is sometimes called the latte effect, though for my three boys it’s really the beer effect.)
Three Financial Tips
Financial literacy in the U.S. could be better. In a recent study of 15-year-old students by the Organization for Economic Co-operation and Development, the U.S. ranked ninth—just behind Latvia—with a score of 492, which was below the average score of 500. China was the leader with a score of 603.
So, what to tell these recent graduates? Here are three tips to help them steer their financial ship:
- Manage your credit score by paying bills on time. It may not seem immediately important to a 22-year-old, but a credit score can be used by prospective employers, leasing companies and even dating sites. Taking a few minutes to set up automatic bill pay means that you never really have to look at the bill. This is a great idea for those bills that are fixed and occur regularly (e.g., rent, cell phone, cable, credit card and student loan)s. You still need to look at the bills, but you have the luxury of doing so when it is convenient.
- Establish an emergency fund in a savings account. This is money that covers you when something goes wrong (job loss, roommate loss, theft, etc.). The National Association of Personal Financial Advisors recommends an emergency fund equal to six months’ worth of living expenses. In order for a recent grad to understand how much it costs to live, use the reporting function of their bank’s online bill pay program to categorize bills. Alternatively, Mint.com is a terrific personal finance management service that will tag your expenses and help you budget.
- Automate everything. Have your savings come out of your paycheck automatically. Setting up automatic deposits from your paycheck or checking account to your company’s 401(k) plan, Roth IRA or even a savings account means you have no chance to spend the money.
Please share these tips with the 20-somethings in your life. If they have questions, contact your Abacus advisor. We hope that as they “decide where to go,” they will be informed by wisdom and financial literacy.
