Getting started early - in Final months of College

**jIM_Ohio** · 08-30-2010, 09:28 AM

Many people here will chime in with their stories, read between the lines and take something from each poster.

#1 spend less than you earn at all times
#2 try not to ramp up spending as income increases- you are living like a college student now, can you live like a college student when you earn 3X as much as you are now?
#3 your primary factor of success will be SAVINGS RATE. This means the percent of your GROSS PAY you save (pay yourself first) will be the deciding factor as to whether you are successful, or more successful than your peers.

My suggestions would be this
1) Save 20% of your gross pay (at all times)
a) put 15% into an account marked for retirement- could be a 401k, 403b, 457 plan or an IRA or a combination of the above.
b) put 5% of gross pay into a cash account for short term savings- what you use this for depends- might be a car, a house, debt repayment or similar.
c) if you mix and match the 15%-5% to 6% to retirement and 14% to debt payment (for a short time) because of high interest rates, that makes sense with 9% interest rates, with investing though, error on side of invest more early in life (in your 20's and 30's) and scale back investing more in your 40's and 50's. Early contributions win out by a factor of 16 or 32 (as in one dollar now is 32 dollars later).

2) Focus on creating a budget which spends 80% of your gross (taxes come out of the 80% too).
a) some here will suggest 50% to needs and 30% to wants, as long as 20% is saved, it matters less to me what the breakdown of the 80% is).
b) as things come in or out of the budget (like a paid of car or paid off loan) reanalyze the budget to see if what you allocate is real.

3) Enjoy life as you go. You do not need to spend money to be happy, so make sure you have balance in your life so its enjoyable.

**snshijuptr** · 08-30-2010, 11:14 AM

I would caution you on canceling your only credit card. In a few years you will want to purchase a house and you will want the oldest credit score you can get. There are 3 parts to your credit age:

1) The time since you opened your first credit account
2) The average age of all your credit accounts (including credit cards & loans)
3) The average age of your revolving credit accounts (your credit cards)

You want all of these numbers to be high. This usually means not closing your credit cards, but charging and paying off the balance every month. You don't have to pay interest to build up your credit score to a reasonable level (above 700).

**jIM_Ohio** · 08-30-2010, 11:24 AM

Originally posted by snshijuptr View Post

I would caution you on canceling your only credit card. In a few years you will want to purchase a house and you will want the oldest credit score you can get. There are 3 parts to your credit age:

1) The time since you opened your first credit account
2) The average age of all your credit accounts (including credit cards & loans)
3) The average age of your revolving credit accounts (your credit cards)

You want all of these numbers to be high. This usually means not closing your credit cards, but charging and paying off the balance every month. You don't have to pay interest to build up your credit score to a reasonable level (above 700).

+1 forgot to mention that cancelling credit car was a bad idea- if anything get MORE credit cards so you can get a house in 3-10 years.

**broncofanfromia** · 08-30-2010, 11:48 AM

that reminds me of a follow up questions - Right now I'm renting and I have a great living arrangement. I live with 3 other roommates so all of my monthly expenses etc, are minimized. And rent is only 250 a month for a 1600+ sq ft house so i can't complain there. I'm on this lease for another year until May 2012.

How do you decide when you're ready to buy a house as far as having a down payment, having the right credit score, being ready in your personal life?

I know the answer depends on many variables including are you single/married, children, job, etc... but how did you guys decide to pull the trigger on buying a house?

..Its going to be hard to let go of a $250 monthly payment for my housing bill

but at least with a mortgage, I'm not giving that money to someone else.

**broncofanfromia** · 08-30-2010, 11:49 AM

Edit - sorry for the double post, my browser kept erroring out.

**snshijuptr** · 08-30-2010, 12:22 PM

Good reasons to buy:

1) You are staying in the same location for 5 years or more. Otherwise you lose out on closing costs.
2) You have reduced your debt to below 7% of your gross income. This is the maximum payment recommended by most brokers. Getting lower would be better.
3) You have a 20% down payment. Look up local housing prices at realtor.com
4) You can take a mortgage with a monthly payment (including principal, interest, taxes, and insurance) of 25% or less of your gross income.

It's a tough road ahead, but starting on it immediately after college is incredibly helpful. I'm 2 years out of college, and we probably still need another 2 years until we buy. We are probably moving in 2 years so we have set that as our savings goal.

**kork13** · 08-30-2010, 03:37 PM

Welcome! You're in about the same place I was when I found this site a few years ago and started to think seriously about my finances. Given your age, you're definitely on the right track already.

First off, remember that smart finances is a lifestyle, not something you do once a week/month when you sit down to pay your bills. Since you asked for books, the one that really helped me "get it" was Millionaire Next Door, by Stanley and Danko. It basically talks about the kind of lifestyle choices and general strategies that will help you build your wealth over time.

As for investments, for now I HIGHLY recommend that you open up a Roth IRA with a discount online broker (Vanguard, Fidelity, T. Rowe Price, Charles Schwab, and others are all good options). You should probably start with buying simple index funds or index ETFs which track and mostly mirror the major indexes. Start funneling any save-able cash you can into it, aiming to max it out ($5000/yr, or $416.66/mo). It's a VERY smart retirement tool, most especially for someone our age, since it will all have decades to grow, and you will owe ZERO taxes on it come time to withdraw. Stick with that strategy for a while until you have more cash-flow and a better understanding of investing before you branch outside of retirement accounts and start working with other types of investments.

As for buying a house don't be rushed into doing it too early. Basically, buy when you need it and when you can afford it. If you know you're going to be staying in one place for a long time, buying sooner can be better. But take your time and when you can afford it, then look at it. But no sooner.

I won't duplicate what's already been said, so I'll simply emphasize a few things:
- Save at least 20% of gross, though more is better. Alot of people here aim for 25-30% if able.
- Enjoy life -- as long as you're saving to your goals, go out and live your life and enjoy yourself!
- Build an Emergency Fund. Right now, the $3600 you're talking about is good; however, make sure to build it up further as your expenses get higher (like when you no longer have roommates).

Last but not least, ASK QUESTIONS! This is a great forum, and there's always someone who will answer even the little questions/issues that may crop up, and we're happy to help. Otherwise, talk to friends, parents, or anyone else you trust and consider to be money-smart.

**MonkeyMama** · 08-30-2010, 03:45 PM

Originally posted by broncofanfromia View Post

but how did you guys decide to pull the trigger on buying a house?

I actually had a really good roommate situation in college. Room in a nice/big house for pennies (compared to the regional market).

Knowing when to buy was easy.

1) I wanted to live with my spouse only, and anything worth renting cost more than buying. (This made the decision pretty simple). Either renting or owning, with my spouse, was going to cost my signficantly more. Either way, was time to move on.

2) Knew we were going to stay in the area for a long time - no doubt about it.

3) Had saved 20% cash Down

4) House payment felt comfortable - running all the numbers. I actually thought my spouse was insane when he told me he did want to buy. Median home price was $500k-ish - and that was over a decade ago. BUT, we started small with a condo, and once I ran the numbers, it did make more sense than renting.

I don't think you can make a truly informed decision until you run the numbers. In my case I just assumed "it cost more than I could ever afford." The numbers were surprising in a good way.

**MonkeyMama** · 08-30-2010, 04:14 PM

I think you have gotten a lot of good advice.

A couple of things to add:

1 - When your income doubles, don't immediately live up to your new means. I think it's important to just take some time to assess the situation and save up a chunk while you can. Don't limit yourself to only saving 20% (the general recommendation). You may find it easy to save much more during this time. Financial gurus say to wait a year before spending an inheritance. A large increase in income should be treated with the similar care, in my opinion.

2 - I'd probably lean towards hitting the student loan debt hard, with the increase in income. You can run the numbers, and keeping a low-interest loan can make more financial sense. But student loans are in a league of their own. They are hard to get out of when things go bad. In my opinion, the student loans have given you an opportunity to double your income. Use that increased income to get rid of the loans, quickly.

As far as starting now, I would focus on cash. You already are. When you are just starting out, you just have so many unknowns. I would not cap your cash savings at $3600. As an adult, I have never had less than $10k cash in the bank. This has helped me to weather many storms quite easily - the kind of stuff that wipes people out early on.

**snshijuptr** · 08-30-2010, 04:40 PM

I'm going to echo MonkeyMama. The transition from college to working is the perfect time to save a ridiculous amount of money. Going from $20,000 a year income & spending to $40,000 income and $20,000 spending is truly a wonderful first step to a great financial future. My husband and I save 30-50% of our income a month because we have slowly raised our cost of living.

**Debt Relief** · 08-30-2010, 06:42 PM

Live as modestly as you can, but enjoy a little of what you make. As others have said, upgrade your lifestyle (apt, whatever) a little. If you can suffer through a 2-3 more years of living like a college student or only slightly better, you can both start saving for retirement AND pay down your debt fast.

Pay yourself first. Build up an EF. Put aside your 20% or so in savings.

Personally, I am a big fan of paying off my smallest debts first. If your CC is your smallest debt then pay the minimum on the private and federal loans, and apply all remaining funds not budgeted for living expenses and savings/retirement toward the credit card. It will get paid off extremely fast.

Then continue paying the minimimum on the federal loans and pay all available funds not budgeted for living expenses and savings/retirement toward the private school loan. I will disappear quickly.

Then apply all excess funds not budgeted for living expenses and savings/retirment toward the federal loans.

I'd be willing to bet you could be out of debt in just a few years. And you will have saved quite a bit for EF, downpayment on a house, and have a nice start on a retirement fund.

You will want to reward yourself from time to time. All work and no play makes Jack a dull boy.

**broncofanfromia** · 08-30-2010, 06:51 PM

I guess I never look at it that way, but when my income doubles, I will have the same expenses. So in all honesty, my first year at the new salary I could save roughly $20k (or put it towards student loans).

Getting started early - in Final months of College