I teach a course at the University of Vermont through the Grossman School of Business titled Personal Finance and Investing. Few colleges have ever offered a course like this. People ask me, “What is this, how to balance a checkbook?” Hardly. Personal Finance is taught so infrequently because it is considered “trade school,” not sufficiently rigorous for the “Academy.”
But personal finance is something that twenty year-olds and even forty to sixty year-olds know very little about. Studies have found that 38% of Americans do not pay off their credit cards in full each month. Fifty percent of Americans have no retirement plan, and 56% of Americans say they have less than $1,000 in checking or savings combined. A lot of people are never going to retire or be awfully poor in their retirement years. They could have benefitted from a little Personal Finance Wisdom.
So here is my end of semester Words of Wisdom to the sixty students in the course. Those of you who have this down, good for you – you have passed the course. The rest of you, take note.
1. Have a budget. Most of us are not compulsive enough to have a line by line annual budget. That’s OK, experiment with what works for you. Online services like Mint or Digit might be the answer. Or try writing down what you spend every dollar on the next month. It will be eye opening.
2. Build an emergency fund. Walk into most auto dealerships for servicing and you will probably walk out with a bill of at least $200. An accident or illness can easily throw your finances out of whack. Try to keep at least three months worth of expenses in a safe and secure savings account.
3. Save…Save…and Save More. The goal is 15% of your gross income into your retirement account every year. Some of this might come from your paycheck and some from an employer match, if you are so lucky. But in any case, “take care of what is difficult while it is still easy.” If you can save 15% of your gross (even 10%) in your twenties and continue this through your sixties, you are going to have a very, very comfortable retirement.
4. Pay off your credit card monthly. Borrowing at 15% and 25% is equivalent to pawn shop lending but this is what credit cards charge. Don’t let this happen to you. And as a sidebar, try to keep your credit card usage to less than 30% of your credit card limit. Charging more than this often negatively affects your FICO score.
5. Monitor your credit score. Learn what FICO is and how it’s figured. Sign up for creditkarma.com to check your credit any time. It is free.
6. Buy a house when you can afford it. Owning a home and paying off the mortgage over time (“forced savings”) has been and will most probably continue to be your best single investment.
7. Cover yourself with insurance. Obviously get home and auto coverage but look into Life Insurance earlier than later. Ask specifically for Term. A healthy, non-smoking twenty year old can get $100,000 of term life insurance for about $10 a month. Amazingly cheap.
Personal Finance isn’t rocket science but there is a lot of slip between cup and lip. The theory is easy, putting it into practice is hard!