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Personal Finance > Five Tips
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5 Tips: Financial basics for new graduates.
April 26, 2004: 3:30 PM EDT
By Gerri Willis, CNN/Money contributing columnist

NEW YORK (CNN/Money) - In the next couple of months, students all over the country graduate from college. For them, the security of the university is about to be replaced by a world full of debt, student loans, bills, and let's face it, responsibility.

So what do you need to know to help you get your financial footing? Here are today's five tips:

1. Manage your debt.

The No. 1 money issue for most graduates? Debt.

On average, undergraduate debt totals $18,900. And the numbers are worse for the 27 percent of students who use plastic to finance part of the tab. They face median credit card balances of $3,400 and student loans of $21,200, according to the federal student loan agency Nellie Mae.

Fortunately, the federal government gives you a grace period after your graduate before you start paying off your loans. This is a short period of time -- 6 months for Stafford loans and 9 months for Perkins loans.

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CNNfn's Gerri Willis shares five financial tips for new graduates.

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During your grace period (or before you leave school), you should receive an exact repayment schedule from your lender. The repayment schedule will describe different options you will have for repaying your loans.

Typically Stafford loan holders will have the option of paying a fixed monthly amount for up 10 years, paying an amount that rises over time in a graduated repayment scheme or picking an income sensitive repayment that adjusts with the amount of money you're making.

But there are ways to manage this debt. Beth Kobliner, author of "Get a Financial Life," suggests grabbing the tax deduction -- you can deduct the interest payments on your loan.

Two, consider automatic payments for your loans as well. Kobliner says some loan servicers will reduce your interest rate if you choose this option.

2. Ignore the marketing pitches.

Freshly-minted graduates are a favorite target of marketers for everything from credit cards to cell phones. They understand the temptations of that first regular paycheck.

While it can be a heady experience, give yourself time before filling up your brand spanking new apartment with furniture and your garage with a hot new car.

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The three big traps to avoid falling into are too much debt, too little savings and too much spending, according to "The Complete Idiot's Guide to Personal Finance in your 20s and 30s."

Instead of reaching for the first credit card offer that comes your way by mail, check out who's offering the lowest rates at cardweb.com. Beware of zero interest introductory offers -- that initial rate can jump dramatically once you move through the introductory period.

That doesn't mean you should cancel your cards. Truth is you need them to establish a credit history in order to buy a car or house. The trick here is not to become a collector of credit cards. You only need a couple to get going.

And avoid department store credit cards -- the discount they offer the first day you open your account is more than made up for by their sky-high interest rates.

3. Automate your financial life.

The Web's good for more than just chat -- you can make bill payments and savings happen without even thinking about it. This will become important as your energies get focused on your career and starting a new life after school.

Start by automating your credit card payments and any utility payments that allow you to pay electronically. You can also put your savings on automatic pilot too. Consider an automatic plan where money is withdrawn from your paycheck and moved into a bank account or mutual fund. Any of the big mutual fund families will help you set up such a savings account.

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Financial planner, Sarah Young Fisher suggests the T. Rowe Price Asset Builder. You can make a minimum initial contribution of $50 to open the account, and then as little as $50 each subsequent month. The money is taken out of your checking account and put into a mutual fund.

As for paying your bills online... whether it be your gas and electric, telephone or cable bill, contact the company or go on their Web site to see if it offers online bill paying. Be aware, though, that some companies may charge a small convenience fee.

Once you've got the experience down, you may want to consider consolidating several bills or payees onto your bank's Web site. This one-stop-shop allows you to pay bills online through your bank.

4. Set up some spending rules.

While it may seem time consuming, try to sit down and plan out a budget. This can be a monthly chart of how much money you are making and how much you plan to spend on everything from daily expenses to paying down your debt.

Ideally, you'll want your overall debt to be less than 20 percent of your annual take-home pay -- although this will be hard for those with student loans. Spend no more than 30 percent of your monthly take home on rent or mortgage payments. And try to save 10 percent of your take-home pay each month.

Once you've, gotten your spending plan figured out you can go on to determining how much you can save. For short-term goals of a year or less, consider investing in a short-term bond fund or money market fund. If your goals are further out, you'll want to take on more risk by buying mutual funds invested in corporate bonds or even stocks.

Also consider putting together an emergency cash fund of three months' worth of your living expenses.

5. Retirement may seem like a lifetime away, but...

If you work for a company that offers a retirement plan like a 401(k) definitely take advantage of it.

Many employers will match a portion of the amount you put into the plan. For example, it may contribute 50 cents for every one dollar you contribute. That's a 50 percent return on your investment.

Another plus of a 401(k) is that you do not have to pay taxes on it until you withdraw the money. The money is tied up until you turn 59 and a half and if you take it out early, you'll be hit with a 10 percent penalty.

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While ideally you want to try to contribute the max allowed, if you can't afford that right away, start small and boost the contribution as you can. This year, you can put up to $13,000 into a 401(k) (that's up from $12,000 in 2003).

Now, if you don't have the luxury of working for an employer that offers a 401(k) or you decide you want to be self-employed, look into an IRA or individual retirement account. The limit on an IRA is $3,000 a year.


Gerri Willis is a personal finance editor for CNN Business News. Willis also is co-host of CNNfn's The FlipSide, weekdays from 11 a.m. to 12:30 p.m. (ET). E-mail comments to 5tips@cnnfn.com.  Top of page




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