Today, I spoke with Beth Kobliner, who is the New York Times bestselling author of Get a Financial Life: Personal Finance in Your Twenties and Thirties. In this interview, Beth gives some great financial advice for young adults who are completely clueless when it comes to money.
Why is a good financial education important to twenty-somethings?
There’s so much noise about the economy and the markets right now that it can be tough to find the information you need to get your own financial life off to the best possible start. Young people have it hard enough just finding a job that pays the bills (and provides health insurance) without having to spend years of their lives making up for avoidable mistakes with credit cards or even just bad budgeting habits.
And the younger you can start building good financial skills, the more time you have for them to work in your favor. If you were to save $1,000 a year (about $19 a week) from age 25 to 34 in a retirement account earning 8% a year, and never invest a penny more, your $10,000 investment will have grown to $168,627 by age 65. But if you don’t start saving until you’re 35 years old and then invest $1,000 a year for the next 30 years (that’s a total investment of $30,000), you’ll have only $125,228 by age 65.
What are your top 3 pieces of financial advice to students?
- Preserve and protect your credit score. Whether you know it or not, you have a score that tells all lenders (as well as prospective employers and landlords) how good you are at paying back your bills. The higher your score, the better. If you’re in your early twenties, just one late payment can easily plunge your credit score nearly 100 points and as a result, credit card companies and other lenders will probably charge you higher interest rates. Go to annualcreditreport.com for free copies of your credit reports (on which your scores are based) and myfico.com for your credit scores (about $16 apiece).
- Pay off high-rate debt first. This is one of the best things you can do with your money. Here’s why: paying off a credit card that charges you 14% (the national average) is the equivalent of earning 14% guaranteed on your money after taxes. Hard to beat that anywhere! If you owe $1,000 and only pay the minimum, it would take you 12 years and $840, but if you pay just $10 more a month, you’ll pay it off in three years and save $585 in overall interest.
- It’s never too early for a Roth IRA. If you report any earned income at all to the IRS, you can invest that amount of money in an individual retirement account, even if the actual dollars going into the account are really coming from family members. (Graduation gifts are a great way to fund an IRA.) Most mutual fund companies and banks will let you create one of these super-smart savings accounts and contribute to it from then on. Your money will grow tax-free forever, and you can withdraw your contributions at any time free from penalties or taxes, which makes these a great way to save for emergencies as well as retirement. (Kobliner.com has all the details here.)
Is it a wise decision to go to graduate school right now because of the economy?
It may not be a bad idea. The unemployment rate for college grads is at its highest level since the government started keeping track of this statistic, and a total of 14.7% of all people in their early 20s are currently out of work, so it may be hard for you to get a good job right now anyway. And if you’re looking to change careers, the earlier you do it, the more time you’ll be in a higher-earning profession to pay off the cost of going back to school.
“One bit of advice: Avoid private loans for grad school.”
Once you’ve taken on all the Stafford loans the government allows ($20,500 a year, or $40,500 for med school), borrow any additional money you need through the Grad PLUS program, which can charge fixed interest rates as low as 7.9%. (For comparison, private grad school loans have variable rates, usually around 10% to 11%.)
Financially, which generation has the most to worry about now and why?
Every age group has its financial challenges. People in their 20s and 30s are putting off starting families, but the recent market downturn has hit people in their 50s and 60s especially hard because their 401(k)s don’t have as much time to recover. The bottom line is everybody’s going to have to save a lot more and maybe work a little longer to retire. But Generation Y, at least, is responding to the challenge. College students are already scaling back on their credit card.
Beth Kobliner is a New York Times bestselling personal finance expert, magazine columnist, and commentator who offers practical advice and insight on a wide range of economic, financial, and money matters. Her book, Get a Financial Life: Personal Finance in Your Twenties and Thirties, offers valuable insight addressing the financial concerns of young Americans, highlighting topics such as student loans and long-term savings for college and corporate audiences. Beth has made multiple appearances on Oprah, ABC, CBS, CNN, MSNBC, NPR, and NBC’s Today. She is featured in the upcoming PBS program “Your Life, Your Money,” for which she was also script consultant. Beth has been a columnist at Glamour, a staff writer at Money magazine and a steady contributor to The New York Times.