Last week economist Louis Johnston of the College of Saint Benedict & Saint John’s University and I discussed personal finances at the Alcuin campus library. The occasion was Money Smart Week, the brainchild of the American Library Association and the Federal Reserve Bank of Chicago that offers financial literacy conversations on everything from managing student debt to retirement planning.
Whenever I participate in an event like this, I walk away wondering why personal finance isn’t an integral part of high school and college required curricula? Yes, society makes many demands on scarce school resources. Still, young adults qualify for credit cards and auto loans at graduation. Those in college take out student loans. They will get both a diploma and a student loan repayment plan at graduation. We can do much more to prepare students to manage everyday finances sensibly.
My remarks emphasized that money management for young college graduates is mostly adopting a few good spending and savings habits. (Money management gets more complicated later in life with family.) For example, with the first job after graduation young adults should automatically have a small sum of money put into savings.
Putting savings on autopilot is an easy way to develop a good savings habit. I would salt away money into bank and credit union savings accounts, money that can be easily tapped. Early in a career the odds are high you will lose a job, quit your job, move apartments, try living in another city or go back to school. Of course, participate if your employer offers a retirement savings plan. Still, in the early years it’s critical to build up savings you can tap without penalty.
A student in the audience asked, what if you want to make your savings harder to get at? One smart technique is to segregate some savings into a Roth IRA. A Roth is funded with after-tax dollars and withdrawals are tax free during retirement. The big advantage of a Roth for someone starting out their career is if you need the money in a pinch you can take out your contributions without tax or penalty. (Don’t touch the investment gains, however). A Roth is essentially an emergency backstop to your regular savings account.
The other recommendation is to be careful with borrowing. In particular, don’t use credit cards to spend more than you make. Manage your savings and debts to allow for freedom of choice in jobs, career and education. Flexibility reflects a low overhead.
Chris Farrell is senior economics contributor, Marketplace, commentator, Minnesota Public Radio.