Episode 77
Congratulations to all the recent graduates!  To honor those who have worked hard to accomplish this great achievement, we’re sharing 7 money tips to help them build a solid financial foundation for their life.  If you’re not a recent grad, that’s ok, these tips can help you too!

SHOW NOTES

 

7 TIPS FOR COLLEGE GRADS TO MANAGE MONEY SUCCESSFULLY

1.    Create your own bank accounts.

2.    Create your Stability Fund

3.    Crush your student loans.

4.    Calibrate your credit.   

5.    Clear out toxic debts.

6.    Consider your future home.

7.    Choose your investing strategy.

1. CREATE YOUR OWN BANK ACCOUNTS.

One of the first things you should do after graduating is make sure you have great checking and savings accounts.

You don’t want to keep your co-accounts which you probably opened with your parents, it’s time to get out on your own. You may want to rethink which bank you’ll want to have a long relationship with.

Bank accounts lay a foundation for your money management system, so they need to give you lots of benefits. Look for a bank or credit union that offers

  • No monthly fees

  • Interest earning checking and savings accounts

  • A great mobile app

  • Easy transfers options

  • Free bill pay, and

  • Mobile deposits

Visit Bankrate.com to compare the best FDIC-insured accounts available for your location or nationwide.

Working with a local credit union can be a great choice! If you have access to USAA (active and former military and eligible family members), there can be some major benefits to working with them, from insurance discounts to good savings rates, and great online service.

 

2. CREATE YOUR STABILITY FUND

 We recently did an episode about the “4 Financial Steps to Purposeful Living”. Starting a stability fund was number 2!

Save before you spend - We always recommend that you, “Save before you spend...so you experience stability today and in the future.” 

1.    1 Month of Living Expenses in Stability Fund (bare minimum)

  • 1 month of living expenses will get you through most emergencies or expenses that are beyond your normal monthly budget expenses.

2.    Continue $150 into savings (any increment of $50 based on income). 

  • Should I be saving or paying off debt? Both … always need to grow the habit of saving.

3.    3-6 Month Stability Fund

  • A smooth transition from one season to the next (job loss, medical emergency, maternity leave, other budgeted items in excess).

Think of the stability fund as an investment in yourself. It’s how you’ll stay calm and cool in the face of a potential crisis like losing your job.

 

3. CRUSH YOUR STUDENT LOANS

1. MAKE ACCELERATED LOAN PAYMENTS.

If you get paid every two weeks, a great strategy to knock out your student loans faster is to make accelerated or biweekly payments instead of monthly payments. There are 52 weeks in a year, not 48. So it’s a sneaky way to get the equivalent of one extra monthly payment made each year.

2. PAY MORE THAN THE MINIMUM.

The longer you take to pay off the loan the more it will cost you in interest.  It’s best to pay as much as you can from the start.  Start with paying at least more than the minimum payment.

Example: If you owe $50,000 at a 5 percent interest rate for 10 years.

  • Your minimum payment would be $53

  • You’ll pay $14,000 in interest over the life of the loan.

  • If you pay an additional $100 each month you’ll save about $3,000 in interest and pay off the loan two years earlier.

 
When you send more than the minimum payment or make biweekly payments, make sure that you add a note to your payment indicating that you want the extra to go toward your principal balance. Otherwise, the lender may think that you’re prepaying the next month’s payment and simply hold it or apply it toward a credit, which won’t help you get rid of the debt any faster.

 

4. Calibrate your credit

How to Build Your Credit

Your Credit Score and Credit Report Matters

  • You may need to borrow for a major purchase (car, house, etc.) .

  • Without good credit you may not qualify.

  • With bad credit you’ll pay a premium.

Credit Score Overview: Information about you gets reported to one or more credit bureaus that maintain the data in your file, known as your credit report. Then companies who want to access your credit report pay the bureaus for your information.

Credit bureaus don’t make lending decisions; they just maintain your data. But credit reports are used by lenders who want a quick way to evaluate you. That’s why they were designed--to provide lenders a snapshot of your current credit worthiness.

 Credit scoring model

  • Analyze the total amount of debt you owe on all your accounts.

  • Revolving accounts (credit cards), take in account the available credit vs. your utilization of that credit. This makes up about a third of your overall score.

  • As long as you make monthly minimum payments on time, your revolving accounts will remain open.

  • Installment loans, such as car loans and mortgages, are different because they don’t have a credit limit and do come with a set maturity or pay off date. When you pay down an installment loan to zero, the account is closed.

A key formula that’s used to calculate your credit scores is called your credit utilization ratio. It’s used only on revolving accounts. It’s a simple formula that compares your credit limits to your outstanding balances. This ratio shows how much available credit you’re using.

  • Example: if you have a credit card with a balance of $500 and a credit limit of $1,000, your utilization ratio is 50%.

  • Keeping a low utilization ratio, such as below 20%, is optimal for good credit. So, by paying down your balance on the card to $200, you could reduce your utilization ratio from 50% to 20% and boost your credit scores.

  • A low utilization ratio tells potential lenders and merchants that you’re using credit responsibly. A high ratio says you’re maxed out and may even be getting close to missing a payment. To maintain the best credit possible, never let your utilization ratio exceed 20% to 25%.

  • The utilization ratio is 30% of your score.  Paying all your debts on time is 35% of the score.

  • As a new graduates you may not have much credit history, which means you probably have no or low credit score. But don’t worry, it’s easy to build good credit over time.

  • High credit scores tell lenders and merchants that you’ve been responsible with money. A good credit history comes with privileges such as low interest rates on loans and credit cards, which can save you a bundle.

  • But low scores mean that you won’t qualify for credit or that it will be expensive. And poor credit can trip up other areas of your financial life even if you never borrow a dime.

 

Other Ways Credit Score Affects Your Finances

Besides reducing the interest you pay when you borrow, your credit affects many other aspects of your everyday life, even if you don’t borrow money! There are a variety of companies and industries that use credit to evaluate you, even though they’re not giving you a loan or a credit card.

  • ·Auto insurance - A few states have banned use of the credit score as a factor in auto insurance, but most allow insurers to look at your score and change your costs based on your score.

  • ·Home insurance - Just like with auto insurance, home insurers also use your credit when setting rates for home, condo, and renters policies.

  • ·Employment - Employers in most states have the right to check your credit reports, with your permission. The idea is that if you have a poor credit history, you might not be disciplined or responsible when handling money. Employers may fear that you have the potential to steal or that you’ll be distracted at work due to financial troubles and not offer you a job.

  • ·Leasing - Most landlords, property managers, and leasing companies check your credit as part of the application process to make sure you’re likely to pay rent on time. If you have poor credit you may get turned down to lease or have to pay a larger security deposit.

  • ·Cell phone contracts - Cell phone companies check your credit when you apply for a new contract to make sure you’ll pay their bill. If you have poor credit you may be charged higher rates, a higher security deposit, and not qualify for top-tier wireless plan offers.

  • Utilities - Credit also plays a big role in utilities, such as water, gas, power, and cable service. Applying for these services is applying for credit—so having poor credit makes it difficult to get them. You might have to pay a hefty security deposit, get someone with good credit to co-sign your application, or get a letter of guarantee from someone that says they’ll pay your utility bill if you don’t.

5. Clear out toxic debts

Once you have credit, it can be tempting to use too much of it.

Every new graduate needs to respect debt. It’s a powerful financial tool that can help you build wealth when used the right way. For instance, you can use low-interest debt to get an education so you earn more over your lifetime, or to buy a home that appreciates in value over time. But if you use high-interest consumer debt—such as credit cards and payday loans—to finance a lifestyle that you can’t afford, it can be devastating to your financial life.

To learn more about debt and how to eliminate it, check out Episode 34-35.

  

6. Consider your future home.

According to a National Association of Realtors study, 36% of home buyers are Millennials or Gen Y, who are age 37 or younger.

Knowing if you should buy a home really depends on:

  • Where you want to live.

  • The lifestyle you prefer.

  • How stable your future income is likely to be.

  • It’s ok to wait if - renting is not throwing money away!

Here’s where to start:

  1. Estimate How Much Down Payment Money You’ll Need

  2. Save your down payment in the right place.

  3. Get pre-approved for a mortgage.

  4. Be a savvy negotiator.

4 Tips for Buying A House

Tip #1: Estimate How Much Down Payment Money You’ll Need

  • Before you can qualify for a mortgage, you’ll need to prove to a potential lender that you have enough in savings to fund a down payment. It’s a one-time cash payment you pay at the home's closing.

  • You must make a down payment because home lenders generally won’t finance 100% of the purchase price. The bigger the down payment you can make, the less risky the loan is for the lender.

  • You can request that the seller pay some or all of your closing costs.

  • Don’t forget, there are closing costs in addition to a home’s purchase price. These costs vary depending on where you buy a home.

  • But remember that in real estate, everything is negotiable.

    • In addition to requesting that the seller pay some or all of your closing costs, you can also haggle with your mortgage lender not to charge certain upfront fees.

    • If you do negotiate with a lender to avoid fees, just make sure that it doesn’t cost you more in the long run. They can make up for fees by charging you a higher interest rate or including fees in the total amount of the loan, which means you’d end up paying interest on your closing costs.

  • The money for a down payment can come from your savings or gifts from family. If you’re already a homeowner, your down payment can come from the money you make when you sell your current home.

A down payment is the percentage of the home price that you must pay at closing. The more you put down, the lower your mortgage payments will be. Some loans require you pay 10% to 20% of the purchase price. Other loans designed for first-time home buyers, such as an FHA loan, may only require 3% down.


  • If you can make a 20% down payment on a home, you’ll avoid paying private mortgage insurance or PMI. PMI is s a special kind of insurance that lenders typically require you to pay when you borrow more than 80% of the value of a property, even if you have excellent credit.

 

Exactly how much down payment you’ll need is difficult to pin down. It depends on the price of the home, the type of mortgage you get, and customary closing costs in the market. In general, you need enough cash to cover these main costs:

  • Earnest money is the good faith deposit you make on a home when you submit an offer. The customary amount varies by market but might range from 1% to 3% of the offer price. If your offer is accepted, the funds are applied toward your closing costs. If not, your earnest money is returned to you.
  

  • Closing costs are fees you must pay at the settlement or closing. They typically include the loan origination fee, appraisal, survey, inspections, attorney fees, taxes, title insurance, and any other processing expenses. You should receive an estimate of your total closing costs from your lender, so you aren’t caught by surprise.

Tip #2: Save Your Down Payment in the Right Place

Once you begin saving money for a house down payment, you may be tempted to place it where it will grow faster.

  • Remember, financial markets are volatile in the short term, which means you could lose all or a significant portion of your money right before you need it. Instead, tuck your down payment savings in a high-yield, FDIC-insured savings account.  This will keep it safe while earning you a bit of interest.

  • Online banks typically offer the highest interest rates because they don’t have as much overhead as institutions with local branches. However, local credit unions can be competitive—if you qualify for membership.

Tip #3: Get Pre-Approved for a Mortgage

Once you’re ready to become a homeowner, have good credit, and plenty of down payment funds, the next step is to get pre-approved for a mortgage.

  • Getting pre-approved will tell you how much you can afford.

  • It also tells a seller that you’re a serious buyer who could close the deal quickly.  This could be an advantage with a seller who needs to sell and close fast.

  • Just because a bank pre-approves you for a certain amount doesn’t mean you should borrow that much. Make sure you calculate not just the P&I (monthly payment + Interest) but also the property taxes, insurance, and PMI (Private Mortgage Insurance) if putting down less than 20%.

  • Additionally, you’ll have to pay utilities, maintenance, and perhaps homeowner association dues.

  • Don’t make the mistake of buying too much house.  Consider and calculate all the costs associated with the house you’re looking to buy and make sure it comfortably fits within your housing budget.

Tip #4: Be a Savvy Negotiator

In real estate everything is negotiable. So, be interested, but not too eager.

  • Don’t fall in love with a house until you’ve closed the deal!

  • When you make an offer on a home, use your poker face with the seller or real estate agents.

  • Most sellers expect you to negotiate on one or more factors of the deal such as purchase price, potential repairs, and closing costs. Always make a purchase offer contingent on the results of a professional home inspection.

  • Before the closing, you should receive the Settlement Statement, Form HUD-1 from the real estate agent, closing attorney, or title company. Review it carefully, ask questions about charges you don’t understand, and make any necessary changes.

  • There will be a stack of documents for you and the seller to sign at closing. You can handle it in person or remotely through the mail. Just make sure you take the time to read through it and ask questions of anything you do not understand.

  • It’s easy to get swept up in the beauty of a home, the décor, the neighborhood, or the new lifestyle that you envision there. But take your time and view every real estate purchase as an investment, even if it’s going to be your dream home.
     

7. Contribute to retirement savings now.

The earlier you start saving, the less you’ll need to save over time. That’s because the magic of compounding allows you to earn interest on your interest, and that gives you a lot more bang for your buck.

Let’s say you begin investing $200 a month when you first get your job out of college.

  • If you never increase your contribution and earn an average 8% return, after 40 years you’d have a nest egg worth almost $700,000.

  • Considering you only contributed $104,000, that’s impressive, because you’ll have $700,000 because of the compound interest from your investment.

Choose to invest through tax-advantaged retirement accounts whenever possible, because they reduce your tax liability. If you’re lucky enough to have a workplace retirement plan (such as a 401(k), 403(b), or 457) never, ever pass it up! Participation is especially important if the employer offers matching, which is free money.

For more on investing, check out episodes 11, 12, 13

RESOURCES

Budgeting and Debt Elimination Tools
GMR Episode 34 - Help! I Can’t Pay My Credit Card Debt
GMR Episode 35 - Dangerous Debt
GMR Episode 11 - Investing: Stocks, Bonds, Mutual Funds, IRA’s, ROTH’s and 401(k)’s
GMR Episode 12 - Index Funds and Brokerages Part 1
GMR Episode 13 - Index Funds and Brokerages Part 2
Jesus on Money by David Thompson - stewardshippastors.com