Increasingly, questions are surfacing surrounding personal finance for all wakes of life (18 years old all the way up to 40+). This post will focus on a College Student who already has a strong set up as follows: 1) No debt, 2) Cash flow from a job and 3) Spending habits in check.
In this scenario here is how you should think about your personal finance.
1) Credit Card for History: Immediately get one. One of the major ways to increase your credit score is by having a long standing track record of on time credit card payments. From now on you should not take out your wallet and spend with cash. Even if you are in a rush and are buying a $2 item, use the credit card. To reiterate, this assumes you have spending habits in check, treat your credit card like it is cold hard cash.
This is a credit card you will never close so choose wisely. Pick up a no fee cash back card. American Express has a blue cash back card, there are certainly ones from Visa and Master Card as well. The idea here is since you will never close the card you want zero fees associated with it and some small reward, call it 1% cash back.
Reiterating the point, it is to build a history of timely payments over a long duration, set it up on auto pay and forget about it.
2) Set Up Emergency Cash: The tired old rule of 6-9 months of living expenses just doesn’t work or make sense. You want some cash in case something bad happens (accident or otherwise) but anything beyond a few thousand dollars is overkill. Feel free to choose as you wish but anything over $5K seems outlandish on paper. Stick the $5K in a money market, never touch it and every year at the end, transfer the interest into your investment account. If an event occurs where you need to shore up more than $5K, simply sell some stock/bonds.
3) Set Up an Investment Account: You’re young. The chances of knowing a space well enough to invest and make real profits is quite low. You’re unlikely able to research and pick a security just yet so play it safe and go open a low cost brokerage account. The account should have no serious fees associated with it, only a $5-10 charge per trade. That should be all.
After choosing a brokerage account you will need to read a basic long-term investing book. After you do, find an index or bond fund that should yield 7%+ over the long term. Do not waste your money with a financial adviser, simply wait until you have another $2-3K or so to purchase more shares of bonds/index funds. This way you do not get burned by transaction fees. As an example:
Person 1: Buys new shares every two weeks, total purchase $300 in shares. However, the cost of putting in the order is $7 or 2.33%. ($7/$300)
Person 2: Same job but buys shares every ten weeks, total purchase $1,500. However, the cost of putting in the order is still $7 which is only 0.5% ($7/$1,500)
Don’t get eaten up by fees, a good rule of thumb would be to wait until the fee was under 20bps, this would equate to roughly $3K. In the mean time, during the waiting period to buy another lot purchase of $3K leave the money in a money market account from Step 2.
4) Create a Journal. You can create a blog or use a personal journal but the idea is to write down on a weekly basis what you learned. What does this have to do with financial advice? Well now you’re finding out what you are an expert in. For example, say you spent the last 21 years studying bio-chemical engineering. Chances are you know quite a bit more about biology and chemistry than your average peer. You can continue to build on this base of knowledge and become an expert in this field. This applies to anything from becoming an expert in technology to mens clothing. Which allows you to slowly learn Step 5.
5) Obtain Niche Investment Knowledge. Assuming you are doing the first four steps to the T, after a long enough time frame you’ll understand new trends in your field. Using the biology/chemistry example perhaps now you understand this space quite well. You notice a trend in the space and believe (insert company) has the best product and will result in displacing (insert product/company). Now you have an investment play.
Notice, this takes a long time, you’re developing knowledge that you can leverage to invest in a security over a long time frame. In the mean time you are spending the rest of your time writing down new information, keeping a safe emergency fund and letting the rest of your money grow over time at a decent clip.
That wraps up the basics, just like everything else in life you slowly build up a base of knowledge until you can take full advantage of it. In the mean time, you can keep your money working for you, with low fees as a percentage of purchase, without attempting to “out trade” the professionals… Which you won’t.
