Sunday, May 03, 2009

Money lessons for graduates

At this time of year as our best and brightest prepare to leave high school or college it makes for a great opportunity to have frank conversation with your kids on the issue of personal finance. I pulled some of the best tips I've seen in recent weeks:

1. ) Savings matter.
If you live within your means, you can be a saver. Savers also have natural budgetary skills and the ability to shop wisely. If you are able to save 12 months of expenses you will be more able to tolerate the unavoidable financial pitfalls that will one day come your way.

2.) Learn to read the fine print.
Every salesman will gloss over the contract for your flashy new phone, car or health club membership. Ask to take a copy of any proposed contract home first. Read it in it's entirety before signing. That 1 day pause might actually cause you to rethink the need for a $75/mth cell phone or you might happen to notice the $175 early termination fee hidden in line 31 of page 15.

3.) Ignore the payment
Perhaps the single greatest problem with every financial agreement - car loan, mortgage, etc - is that too many people focus on their monthly payment. Can I afford the home if I make X? Sure, let's just make that an interest-only loan with payments over 40 years and an 80% balloon payment in year 40. The point being, that I can create any "payment" to match your income stream. Your job as a financially astute consumer is to ignore all of that white noise and focus on the price and only the price.

"Some lenders may encourage grads to consolidate and stretch out their students loans, paying them off over 20 years instead of 10 to lower the monthly payment.
Repaying $10,000 in 6.8% loans over 20 years will cut the monthly payment to $76.33 from $115.08. But it will also more than double the interest paid -- and your payments will total about $18,300, instead of $13,800."

4.) Debt is the great divide.
Debt is the single greatest threat to you new graduate's financial future. Credit card companies will be offering freebies at every corner when they role onto campus in the fall. While debt has its place in our society it can quickly put a new graduate behind the financial eight ball.

5.) Don't rush out and buy that new car.
This is a little subjective and frankly, it's probably never been a better buyers market for autos. However, I'm a big believer in letting the original owner take the depreciation hit. If you need reliable transportation, consider a high quality, low mileage, pre-owned vehicle.

The market continues to meander around near the highs of early April. There will be many chances to rally from here for anyone looking for good news. Some of the banks will fail the stress test (the watered down stress test) but they will challenge the results and happy days will be here again...

The vast majority of buying interest has come from two sources - short covering and aggressive momentum traders. Momentum traders trade the direction of the market and don't care whether the market's up or down as long as it's moving. As of late, the move has been up and they've been long, but that trend can reverse itself just as quickly.


1 comment:

Anonymous said...

Thanks for your tips for graduates. I'm forwarding on to our children - all young adults, graduates and one a junior in college who thinks she needs a new vehicle NOW!! They have all driven used vehicles purchased by their father reasonably at auctions.