Ten Tips for Recent-College Grads to Save More Money

Ten Tips for Recent-College Grads to Save More Money

While money might be tight for recent college grads, there is no better time to start putting some money away for the future. Here are ten tips to help you save more.

You're finally done with school for a while and have begun to earn some money instead of always spending it. While savings may not be on the top of your mind, it should be. Money that you save in your twenties has a long time to grow and with the power of compounding interest can become quite large in the future. Whether you decide to use that money to start a business, buy a house, or live comfortably in retirement, the earlier you get into the habit of putting some money away, the better.

Below are some tips you can use to maximize the amount of money you put into your bank or investment accounts.

  1. Write it down: In college it was acceptable to live paycheck to paycheck (or entirely off your parent’s generosity). Now that you’re on your own, one of the keys to sticking to a budget is committing to it on paper. There is a difference between not spending all your money and purposely setting money aside for future use. Everyone has a point of diminishing marginal returns between spending money now and saving it for later, but whatever that point is for you, make sure you’re setting a consistent amount per paycheck aside. One suggestion I’ve heard for those struggling to stay on budget is to take out the amount you’ve budgeted to spend for that month in cash. That way, when the cash runs out you know you’ve hit your budget. It’s much harder mentally to part with bills than it is to buy something with the swipe of a card.
  2. Take the Match: If you’ve managed to snag a full time job then it’s possible that your employer is offering you a 401k match program. Take the match. This is free money.  Not only will your company be depositing extra cash into your account via the match, but the money grows tax-deferred, meaning you will not be taxed until you withdraw the funds later in retirement. If you really need the money later in life, you can also borrow against your 401k funds.
  3. Interest Rates and Inflation: It is important to realize that the interest rate you think you’re getting on your savings account, certificate of deposit (CD)[1], or bond is not the return you’re actually receiving on your money. As the amount of currency in the economy increases, so does inflation, meaning that your gains are relatively worth less. In fact, if the inflation rate is high enough and your interest rate low enough you are essentially gaining nothing by leaving your money sitting in your account. The bank knows this of course, and adjusts interest rates according to inflation, (the “real” interest rate). Do your homework, and keep this in mind when deciding where to keep your hard earned coin.
  4. Build credit while you can: You might be wondering what place a spending vehicle has in an article on savings, but building credit is actually critical to saving money in the long run. You’ll want credit later in life (or even now) to buy a car, house, or any other sizeable bank-financed transaction. Unless of course you can pay for all of that in straight cash, it’s good to get a credit card while you have a consistent income (assuming you have one) so that you can secure a favorable credit limit. The goal here is to buy a durable good and pay it off slowly and on time. By doing this you can build a solid credit history and secure a lower interest rate when it comes time to take out a loan.
  5. Credit unions are your friend: They tend to give you better interest rates than typical banks, less and/or lower fees (which are always helpful when you’re just starting out), and favorable annual percentage rate of charge (APR)[2] on credit cards. Mine in particular has the added benefit of only charging a 1% fee on all international transactions, making it an ideal tool for traveling abroad. Credit cards also have the added bonus of refunding fraudulent charges where a debit card does not. You can find credit unions in your area here.
  6. Know your loans: There is a small minority of students who are fortunate enough to graduate without debt, but for the rest of us, loan payments will soon become a part of our monthly “routine”. That being said, there are certain things you can do to mitigate some of the damage to your wallet. One of those things is loan consolidation, which is available for federally funded loans (I’m currently considering this option as we speak). Loan consolidation can result in a reduced overall amount of debt, and only having to worry about one loan payment makes it less likely that you’ll end up with late fees (not that you’d ever forget anyways).
  7. You don’t have to pay for it all at once: This is true for loans and any other transaction where you don’t have to pay the entire balance up front (which is everything if you use a credit card). The tradeoff between avoiding interest rates and having spending flexibility (and future savings accumulation) cannot be ignored or pawned off due to ignorance of other options. Just because you have the funds to pay off sizeable chunk of your loans doesn’t mean you have to or should. That cash could be used to fund other opportunities and get you through periods of unemployment, so you’re not forced to take a job you don’t like just to pay the bills. It’s also a consideration you have to make when determining whether or not to buy or lease a car, for example. It’s nice to own your ride, but leases tend to come with maintenance and give you more month-to-month flexibility.
  8. Don’t be afraid to negotiate: There are few things in life that are non-negotiable, and the ones that aren’t you can still try to finagle. Whether it’s overdraft fees or interest rates on your accounts, you won’t get what you don’t ask for. Banks today are a dime a dozen, and they heavily compete to house your precious earnings. If you don’t like what you’re hearing, switch banks, or at least threaten to.
  9. Hold off on health insurance if you can: Thanks to the Affordable Care Act, we all get to stay on our parent’s health insurance until we’re 26. If they’re ok with keeping you on the plan and/or the cost of your company plan is more than what it takes to keep you on your parent’s plan, then opt out of insurance at your full time job. Companies deduct benefits from your salary, and one easy way to save is to take more home each paycheck. However, if you do need insurance and are working a temp job (which usually won’t provide insurance) or on the job hunt, it might not be a bad idea to work at a local CVS or grocery store to be eligible for benefits. You can’t work if you’re not healthy, and without health insurance medical fees can make visits to the doctor unaffordable.
  10. Read your snail mail: This is something I haven’t always been the best at (that’s why they have e-statements and notifications), but it is important. Your bank, credit union, or other financial institution will periodically send things to you in the mail. These documents range from bank statements to changes in terms and conditions and *gulp* even fees. If you don’t read your mail, you won’t know it happened, and you’ll be setting yourself up for failure. Do yourself a favor, and sift through all the junk mail to make sure you’re not missing anything.

This isn’t by any stretch of the imagination meant to be an exhaustive list of guidelines, but they are easy to implement and can pay huge dividends if adhered to. Look out for the next article on digital tools you can use in conjunction with these methods to keep your life on track.

Are you a recent college graduate with some other money saving tips? Post them below. I'd love to hear them.

 

[1] A financial product with a set maturity rate that pays the owner an agreed upon interest rate in exchange for restricting withdrawing funds on demand without incurring a penalty. They typically range in length from one month to five years.

[2] The rate per annum at which your financial institution charges interest on your outstanding debt

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Citibank Offers A 15 Year Fixed-to-Floating Rate Structured Note With a Yield Up to 10%

Citibank Offers A 15 Year Fixed-to-Floating Rate Structured Note With a Yield Up to 10%

Rate information contained on this page may have changed. Please find latest savings rates.

Citibank is syndicating an interesting Structured Note which is very similar to the one issued by JP Morgan last month, but is callable, has a 10% coupon and has no S&P contingency.

I have written previous articles on this website about Structured Notes (an introduction to these notes is here).  While Structured Notes involve real risks, I have suggested that those trying to put money away safely with a long horizon can pick up yield by placing some small part of their assets in these Notes.

In this recent article, I discussed a JP Morgan Chase issue that was tied to the spread between the 30 year Constant Maturity Swap (CMS) and the 2 year CMS.   The instrument, which is now fully syndicated, pays the 30 year rate minus the 2 year rate times 4 to a maximum of 9% annually, provided the S&P stays above certain benchmarked levels.

This new Citibank offering is similar, except it is tied to the 5 year CMS instead of the 2 year.   The Note, which is callable, pays 10% in the first year and then in years 2 through 15 pays four times the 30 year CMS rate minus the 5 year CMS rate to a maximum of 10%.   Determination of applicable rates is based on a measurement date 2 business days before the quarterly pay date, and the Note pays nothing if the 5 year CMS rate is greater than the 30 year CMS rate on that measurement date.

I was somewhat enthusiastic about the JP Morgan Structured Note and actually took a small position in it.   The Citibank Note will be more interesting to some as it has certain advantages over the JP Morgan issue.  In particular, I discussed the large risk associated with the payment condition set in the JP Morgan Note that the S&P index not fall by more than 25%.  The Citibank Note does not have this S&P contingency; it is entirely based on the CMS spread.   It also pays 10% in the first year and can pay up to 10% in subsequent years.  Earning 10% on your money is obviously more attractive than 9%.

I personally am not sanguine and would not recommend buying these Citi Notes for three reasons.  First, unlike the JP Morgan Notes, this Note is callable after the first year.  On an illiquid 15 year note, a call feature creates tremendous disparity between the buyer and the seller/issuer.   The seller, Citibank here, has the option to call it quits at any given quarter if the spread is not moving in their favor.  Second, I am more concerned especially when I look out over a 15 year horizon at the spread between 30 year and 5 year interest rates (as reflected in CMS), than I am about the spread between 30 year and 2 year rates.  (I will however admit that charting the rate for the last 15 years shows that the risk has not been dramatically greater.)  Third, Citibank is less credit worthy than JP Morgan, and would be more vulnerable in the event of another banking crisis in the next 15 years.

Rate Comparison

While I wouldn’t recommend this instrument, those interested in this note can find it listed under CUSIP 1730T0A82 and ISIN US1730T0A821.


How Much Cash Should Retirees Hold?

How Much Cash Should Retirees Hold?

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There is a lot of information available on how much of a retirees portfolio should include of stocks and bonds but when it comes to cash, the information is almost non-existent (for the purpose of this article, I am defining cash as money held in a bank or credit union and covered by FDIC or NCUA insurance). Interested, I went in search of answers and found some good advice that can guide any retiree when thinking about the cash component of their saving and investing plan.

Several months ago I wrote an article providing some guidelines on how much of a person's assets should be in cash. After writing the article, I began to ponder the question in even greater detail, especially as it relates to retirees. 

There is a lot of information available on how much of a retiree's portfolio should be comprised of stocks and bonds, but when it comes to cash, the information is almost non-existent (for the purpose of this article, I am defining cash as money held in a bank or credit union and covered by FDIC or NCUA insurance). Interested in learning more, I found some good advice that can guide any retiree when thinking about the cash component of their saving and investing plan.

I first spoke with Phil Demuth, a frequently consulted investment advisor to high net worth individuals. He is a contributor to Forbes and is the founder of Conservative Wealth Management LLC. In Phil's opinion, cash has two functions:

One, it allows holders peace of mind and the ability to sleep soundly. This is especially true in difficult economic times (think back to 2008). Two, cash provides individuals with flexibility so that they do not need to sell volatile assets when prices drop and they can maintain liquidity in a bear market. Cash also allows individuals to take advantage of buying opportunities when the market is down. Individuals with lots of cash do not need to panic in hard times. 

The downside of cash is the opportunity cost. Money invested in an FDIC insured account paying 1% APY is losing ground when the stock market goes up 10% or more in a year. Several other investment advisors I spoke with didn't like the idea of including cash in a retirement portfolio. David Houle, CFA from Seasons Investments stated that: 

 "In my opinion there's very little reason to hold cash in a retirement portfolio, especially given the low yields to be had on cash holdings. What's implied by the term "portfolio" is that it's the pool of savings that have been set aside to be invested for capital gain and income. That money, in general, should remain fully invested in assets that are going to generate a return. There are periods of time where one might want to hold cash temporarily for tactical reasons, but this is different than carving out a permanent allocation dedicated to cash."

 Ilene Davis, a Certified Financial Planner echoed David's comments, saying:

 First, to clarify, what some people consider their "retirement portfolio" are the qualified plans they have. A true retirement portfolio should include anything that is likely to be liquidated to provide funds through the retirement years.

Therefore, instead of focusing on a percentage that should be in cash, I would recommend that the focus be on how many months of expenses, plus emergency fund, should be in cash.

Brian Frederick, a CFP from Stillwater Financial Partners told me that:

The cash portion of a portfolio depends on someone’s age and what their work status is. For people in retirement, I typically like to see one to two years of living expenses held in cash or CD’s as it will provide a risk free source of money if they need to tap into it unexpectedly. For people still working, I encourage them to have 3-6 months of cash set aside for emergencies. Ideally, this would be in a separate bank account but I’ve also had clients do it inside of a Roth IRA if that’s their only money.

He continued to say:

Interest rates fell off a cliff around Thanksgiving 2008. As a result, cash should be viewed more as a safety net than an income producing asset class. The other side of the coin is that it is dangerous to reach for yield by using bonds – bond prices go down when interest rates go up. Most bond funds this year have lost money as a result of interest rates going up in May & June.

So does cash belong in your portfolio or is it just a part of your emergency fund? Unfortunately, there is no one formula to determine how much of an individual's net worth should be held in cash. It depends on how you think about investing and also your own emotional thresholds and risk tolerance.

Almost all of the experts agreed that at a minimum, those in retirement should have at least 3-6 months of living expenses in cash, while many think that 1-3 years is more appropriate.

Lower Risk Tolerance

Beyond this emergency fund, if you believe, as the famous investors Benjamin Graham and Warren Buffet do that cash is king, then you should set some aside to buy low, when everyone else is heading for the exits. This is exactly what Warren Buffet did in 2008, getting bargain prices on Goldman Sachs and other distressed companies and assets. Cash should also be part of your portfolio if you lose sleep every time the market dips. Peace of mind is itself a valuable asset. The percent of your portfolio you hold in cash will depend on the net worth of your assets, your income needs, and a variety of other factors. Mr. Demuth did caution that investing in bonds is not a substitute for cash. While some short duration, high quality bonds may approach cash in their risk profile, bonds can lose value and some can even default.

Higher Risk Tolerance

If you believe that markets will not crash during your retirement, market volatility does not bother you, you have enough wealth to weather a potential loss in assets, or you want to get the highest yield on your assets, then you should limit your cash to an emergency fund to cover living expenses for a certain period of time.

A qualified investment advisor will be able to listen to your need and design a suitable portfolio.

For the cash that you do hold, make sure you are maximizing its return by getting the best possible rate. BestCashCow's rate tables provide the most competitive rates on savings, CDs, and other FDIC insured or NCUA insured bank and credit union accounts.

You can also use our Savings Booster Calculator to see how much extra income you can earn by switching to a high yield FDIC account.

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