Sunday, May 31, 2015

Common Sense 'Walk and Chew Gum' Advice for This Year's Graduating Class ... Providing for the Needs of Your 'Older Self' is Equally Important to Experiencing the Pleasures of Today

18th century French philosopher Voltaire observed that common sense is not so common.

And Walter Mischel's 'Marshmallow Test' conducted at Stanford in the 1960s revealed that all too often we don't practice self control and follow the common sense approach of treating the needs of our future self as the responsibility of our present self.

With that in mind, let's look at some extremely valuable and timely advice for this year's college graduates. -- and all other young people about to enter the 'real world' of adulthood.

A Financial Checklist for 20-Somethings is subtitled 'Getting started on retirement saving and repaying high-cost debt can pay huge dividends in the long run for new college graduates:'

"You have graduated from college and landed a job. Planning for retirement may seem like a distant concern, and paying off your debts may feel like a monumental task. But now is the time to make some crucial financial moves that could pay off handsomely in years to come.

“You need to have time work in your favor,” says Annamaria Lusardi, a professor at George Washington University who specializes in personal finance. “The trick is really to start early.”

Many young adults miss the opportunity. Less than one-fifth of workers age 21 to 24 participated in an employer-based retirement plan in 2013, the most recent year for which figures are available.... Among workers age 25 to 34, the participation rate was just over 38%. By contrast, for workers 55 to 64, the rate was over 55%. . . .

In many cases, the most beneficial move is to enroll in your employer’s retirement plan, to take advantage of any savings incentives. . . .

Then consider tackling any high-interest debt. . . .

Once you have checked off those items, you can consider whether it is possible to boost your savings and learn about simple, smart ways to invest the money. . . .

Time is money

Earning power is often limited in your 20s. You may not have enough knowledge or experience to command a large salary.

But you do have an asset your elders covet: time.

Make the most of it, even if you save only small amounts at the outset. . . . The pile may grow slowly at first, but the pace will accelerate as you continue to save and the numbers get larger.

That compounding effect gives you an advantage over people who postpone saving. . . .

Free money

The best place to start saving for retirement is often the 401(k) plan offered by an employer.

There are a number of benefits to the plans, which are known as defined-contribution plans, including the ability to defer paying taxes on contributions and investment gains if you leave the money alone until retirement.

Many employers also offer an incentive to participate in a 401(k) plan, in the form of a matching contribution. Some financial advisers refer to the match as free money, and you should do what you can to take it. . . .

Try to contribute whatever it takes to get the maximum match. . . .

To be sure, some employers have a 401(k) plan but don’t offer to match employee contributions. But it can still be worth putting money into the plan, because of the tax deferral and because the money comes straight out of your paycheck, which makes saving easy, financial advisers say.

Pay your debts

Once you get free money from your employer, make sure you aren’t throwing your own money away on interest charges.

If you have taken on substantial student debt to get through college or run up a large credit-card bill while getting settled, consider tackling that next.

Paying off any high-interest debt should be a higher priority than putting additional money in your 401(k), because the costs add up quickly . . . .

For example, it will take more than 22 years to pay off $10,000 of debt on a credit card that charges 18% annual interest, if the card requires a minimum monthly payment of 3% of the outstanding balance and you always pay that minimum . . . . You would also pay $9,799 in interest over that period.

Also take a hard look at your student loans . . . . debt that costs you more than 5% a year in interest should be a priority. . . .

The next step

Once you have paid off your debt, you can turn your attention back to saving. . . .

Investing 101

Whatever type of retirement plan or account you choose, you also have to decide how to invest the money. . . .

But don’t sweat too much over whether you should be 60% in stocks or 80% in stocks when you are in your 20s—or higher or lower, for that matter. Pick something you are comfortable with and stick to it.

“When you’re starting out, asset accumulation is more important than asset allocation . . . .

Still, some issues could arise that are worth keeping an eye out for. If you don’t actively choose how to invest the money in your account, some plans will put it not into a target-date fund but a money-market fund, an ultraconservative fund that may be more suitable for someone in retirement who needs the cash soon.

When choosing a fund, it is worth looking closely for those that charge lower annual fees, 0.5% of assets or less, which in many cases are passive index funds. Higher fees can significantly reduce your returns over time. . . .

Try to focus on the long-term benefits of saving. Billy Weiss, 24, graduated from the University of Wisconsin-Lacrosse in 2013 and got his first full-time job last June, at a North Dakota nonprofit. He plans to start contributing to his employer’s Roth 401(k) in July, the next enrollment period, and expects to invest in a target-date fund.

“Having a real job and making money allows you to indulge in grown-up purchases and the freedom to enjoy life in a way you couldn’t as a poor college student, but the catch is to not be impulsive or overspend or buy things you don’t need,” he says.

“My goal is to suck it up and be really diligent about saving money now,” Mr. Weiss adds, “and over time hopefully that amounts to something good.”

Summing Up

Billy Weiss is wise beyond his years.

While it's true that we're only young once, it's equally true that we're only old once.

Upon entering the work force, taking the time and making the effort to take good care of both our younger and older selves is a great plan.

And once that's become our plan, immediately getting into the doing isn't that hard either.

As amateur philosopher and the shortest ever NBA dunk champion Spud Webb once said, "f you can dream it, you can do it."

That's my take.

Thanks. Bob.

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