Financial Advice for an 18-Year Old
February 14, 2013There’s a lot of financial information out there for people at various stages in life. But what about for those just starting out in adulthood? How can they get off on the right financial foot?
I recently got a question from a workshop participant about what financial advice I would give to her 18-yr old son. Here are some thoughts:
1) Get a job. Even if they don’t need the money, working can teach important skills for the job market that you don’t learn in school. One of my first jobs was selling cutlery in people’s homes, which gave me the sales experience and confidence to get into the investment brokerage business right after college. Working for money also teaches kids the value of a dollar, which you don’t learn getting an allowance. Finally, a job doesn’t have to get in the way of school. In fact, a Bureau of Labor Statistics study found that students who worked 1-20 hours a week actually got better grades than ones who didn’t work.
2) Open an online checking account. Once you have a checking account and establish a direct deposit and automatic payments, it can be a hassle to switch so this is a bigger decision than it may seem. Since young people already do everything else online, why not reduce fees, earn a higher interest rate, and get ATM fee reimbursements with an online checking account? You can search for one on sites like depositaccounts.com.
3) Contribute to a Roth IRA. After getting that first paycheck is a great time to learn the value of saving as well. A Roth IRA makes an especially good savings vehicle for several reasons. First, it gets them in the habit of saving early for retirement. (A single $5,500 Roth IRA deposit at age 18 invested at an 8% annualized rate of return would grow to over $200k by age 65.) Unlike other retirement accounts, if they need to access their contributions sooner, they can do so without tax or penalty, but they have to fill out a withdrawal form, which can discourage dipping into it for frivolous purposes. Finally, opening the account starts the clock ticking for the 5 year waiting period, after which up to $10k of earnings can be withdrawn tax-free for a first-time home purchase. I opened my first Roth IRA at age 22 but wish I had done it sooner.
4) Start building a positive credit history. This is particularly important for young people without any credit since a good credit history can help them get two of the most important factors in building wealth: a job and a mortgage. This can start by becoming an authorized user on a parent’s credit card, where the parent can monitor their credit usage and help teach them not to spend more than they can pay off in full at the end of each month. Once they get their own card, they should look for one with no annual fee and good rewards since they’ll want to keep it for a long time.
5) Choose an affordable school. In a lot of ways, paying more for a higher ranked school is like paying high fees for a top performing mutual fund. There’s not a lot of evidence that it pays off. (An exception is for the small number of students who want to work at a place that puts a lot of emphasis on prestige like a Wall Street investment banking firm.) Instead, students are generally better off with a school that fits their particular needs and doesn’t leave them with burdensome loan payments. In my case, I went to NYU for college and USD for law school based largely on scholarship money. (I also chose NYU for the journalism program and USD for the tax program and ended up doing neither.) A recent New York Times article highlights the value of getting a college degree for as little as $10k through online and distance learning.
Any other suggestions that you would give to an 18-year old? How about from your own personal experiences? Share your thoughts in the comments section below.