June is the month for high school graduation festivities here on Cape Cod. It’s an exciting time of year for these kids and their families, because the future is bright and the possibilities seem limitless. But many of this year’s graduates may not be well-equipped to handle some of what life is going to throw at them, thanks to a deficit in their education…financial literacy.
I really find it hard to believe that only five states require high school students to take at least a half-year course in personal finance. According to Champlain College’s Center for Financial Literacy, only Alabama, Missouri, Tennessee, Utah, and Virginia make the list. Massachusetts is not. We in the Bay State may pride ourselves on our educational standards, but Champlain College gave Massachusetts an F for a grade. Massachusetts neither makes personal finance a graduation requirement nor includes personal finance concepts in its social studies curriculum framework. In my opinion, that is a shame.
When I was growing up my financial literacy started with getting paid for my first paper route and flipping burgers at the Raynham Dog Track. I learned from my parents the basics of personal accounting, like how to balance a checkbook and the value of a buck. That prepared me for a lot of what was to come. Unfortunately, it’s not that easy anymore. Most kids enter their college years already burdened with the prospect of a decade or more of significant debt to pay for school.
Although technology has made it easier to both spend and track money, without the appropriate knowledge and discipline, many graduates will be entering the adult phase of their lives without the right skills to make sure their financial future is secure.
With that in mind, I’d like to offer some suggestions for today’s graduates, suggestions to help them think smartly about their finances and make decisions appropriate and conducive to their future success.
First of all, you have the technology. Use it. Track your spending. Use budgeting tools to understand where your money has gone each week, and more importantly, where it’s wasted. And since you will be tracking where your money is going, develop and follow a budget. Tracking your spending and budgeting are two sides of the same coin. Graduates – I do this too! You don’t need complicated software; I use Excel.
Respect the power of compound interest. One of my heroes, investor Warren Buffet, has called it the most potent factor behind his success. The sooner you save, the sooner you invest, the more you will have to show for your efforts, so get cracking!
Don’t get into the habit of thinking you’ll save whatever you have left at the end of the month, that never works. Savings must come first. One way to do that is to make it automatic. Set up a systematic transfer of a specific amount every month from your checking account to a savings account of some sort and invest that money.
Compound interest is a double-edged sword, however. Interest on debts also compounds. Credit cards, student loans, and other compounded debt can feel like an avalanche. Be smart and make it a priority to pay off such debt rather than let it become a trap.
I strongly urge you to live within your means. As recent graduates, you will be approached with many offers of easy credit – credit cards, auto loans, and more. While it’s important for young folks to build credit, think about how to use your credit, before you use it. Don’t acquire debt without a clear way to pay for it. You want to build credit, but more importantly, you want to maintain a high credit rating.
Consider this – American credit card debt hit a record high in 2017. Credit bureau Experian says that the average American’s balance on credit cards was $6,354. Given the high interest rates we pay to keep money on credit cards, that’s a lot of money put in the pockets of banks that you could otherwise make work for you, with smart savings and investments.
Remember, you are part of a generation that is going to have to look out for its own retirement needs in ways your parents and grandparents may not have. Pensions are few and far between, and not everyone qualifies for employer-sponsored retirement plans, either. So, it is important to explore any and all options to save for your retirement. Educate yourself about Traditional IRA and Roth IRA rules and take advantage of the most appropriate retirement vehicle available to you.
Although many of you who are headed off to college in the fall are likely not going to work full-time while getting your education, remember, this is the age on the side hustle. As I tell my own kids, you don’t always need to be the smartest person in the room…but you better be the hardest working.
There are hundreds of ways to make money outside of what you may consider traditional employment. Look for opportunities wherever you can find them, but don’t be frivolous with what you earn. If there is one thing you learn from reading this column regarding building financial freedom, make saving and investing your priority. Put whatever you can aside, whether you’re working on your own as a freelancer, doing a side hustle to earn money, or just working part-time while you are in school.
Starting out your life with solid financial habits creates a foundation on which you can build the rest of your life. But you, the graduate, must take action and have the desire, determination, and dedication to do it.
That’s why I tell you each week to be vigilant and stay alert, because you deserve more!
And all of us at Cutter Financial Group congratulate all of the recent graduates!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC. A wealth management firm with offices is Falmouth, Duxbury, and Mansfield. Jeff can be reached at firstname.lastname@example.org.
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