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Old 06-17-2006, 01:42 PM   #1 (permalink)
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Advice to All You Graduates: Let's Start With That Daily Latte . . .

Not just for those that are recent graduates, it's a nice reminder to remember that money is a finite resource in one's lifetime.

I'm currently struggling with getting back on the cooking at home deal. It's easy here in the city when I can go out down the street and get roast duck over rice for $3.50 and that's enough food for 2-3 meals.

Quote:
Your Money
Advice to All You Graduates: Let's Start With That Daily Latte . . .
By DAMON DARLIN
This is the season for giving advice to graduates as they enter the workplace. Instead of listening to yet another recitation of the usual admonishments to "change the world," "carpe diem," or "wear sunscreen," those graduates unless they are already trapped on the nonpaying internship hamster wheel need to hear how to manage their paychecks.

Parents may have tried this. And many will undoubtedly send this article to their children.

But, dear graduate, before you wad this up and toss it next to the keg still sitting there from last week's party, consider this: If you think it is tough living on very little now, imagine what it will be like when you are old and sick.

Surveys say most of you already suspect Social Security will not be around after mom and dad deplete it sometime during your peak earning years. A recent survey by the Pew Research Center found that 61 percent of Americans 18 to 29 years old favored a system of privatized retirement savings accounts.

Let's start with the easy stuff first.

Make your own coffee You probably know you spend a lot at Starbucks, a company that collected $6.4 billion from coffee drinkers last year. You probably don't have any idea how much of that total came from you. A calculator at www.hughchou.org/calc/coffee.cgi let's you figure that out and also forecast how much you will spend over a decade of coffee breaks. (This Web site contains a treasure trove of financial planning calculators.) Say you spend just $3.50 every workday for your latte. If you drank the free office brew instead, you'd have more than $11,500 to play with after 10 years.

Does coffee shop coffee taste better than the free stuff? Probably, but ask yourself, do you want to live in a roach-infested studio apartment with two roommates your entire life?

By the same logic, if you smoke, now is a good time to quit. Doing so will save you on average $25,600 over 10 years.

Learn to cook Unless you have learned the art of sneaking into conferences at hotels to snag a breakfast croissant or cocktail-hour shrimp, you need to reduce your dining budget. A twice-a-week kung pao chicken takeout habit can easily drain you of about $10,000 over 10 years.

At the very least, learn how to pack a lunch. Taking your lunch to work may seem like the equivalent of sitting with the nerds in the school cafeteria, and going out to lunch with colleagues can sometimes be a smart career move. But bringing your lunch lets you be more choosy about who you are eating with and saves money. How much? Back to the online calculators (www.hughchou.org/calc/lunch.cgi) and you'll discover that the savings could be as much as $23,000 in 10 years.

The tally so far: $34,500 (for the nonsmokers), or enough to make a down payment on a $172,500 house. That won't get you much in most big cities, so you really need to exert yourself.

Pay yourself first If you do everything suggested so far, you haven't had to sacrifice much except perhaps a regular lunch with the office jokers. Now, prepare to sacrifice.

Set aside 10 percent of your paycheck in a savings or brokerage account separate from where the rest of your money goes. You'll be less tempted to spend it if it is hidden away there, unattached to a checkbook or an A.T.M. card. If your employer has direct deposit of paychecks, your paycheck can probably be directed to different places.

Here comes the tough part. You are going to squirrel away this money in addition to the pretax money that you take out of your paycheck to save in the company 401(k). Only 31 percent of workers 18 to 25 participate in a tax-deferred 401(k) retirement plan, according to a recent survey by Hewitt Associates, an employee benefits consulting firm. The others undoubtedly assume that they'll get to it later. About two-thirds of workers 42 to 59 have money set aside in a 401(k).

There is an important reason you want to start early, even though it hurts. Say you withhold $375 a month for your 401(k). In 40 years, you'll have $750,000. But those who waited a decade to get started would have only $377,000.

And guess who delayed? Mom and dad. The average amount in a 401(k) is less than $60,000, according to the Investment Company Institute, a trade association of retirement fund companies. Generation X isn't in any better shape. A study by the Center for Retirement Research at Boston College found that 49 percent of those born from 1965 to 1972 won't have enough money at retirement to maintain their standard of living.

Another bit of advice: Stick the money in the broadest stock index fund offered by your plan, not bonds and not a money market fund. Sure, the markets may stumble at some point during the next 45 years, but history has shown that they will rise over a period that long. You take risks when you are young.

Ignore your raises Every time you get a raise, and you'll get them because you are working hard instead of spending money you don't have, pretend you didn't get one. Bank the entire amount.

Over time, you'll start spending the money. It's human nature. But you'll start spending it more slowly. You'll keep the car another few years. You won't immediately move to a new apartment. All that helps money to accumulate.

By this point, you may be screaming: "I can't afford to do this. There will be nothing left for me to live on. Have you seen my student loans?"

A few words about those loans. The government will make its annual adjustment of interest rates on existing student loans on July 1 to reflect recent increases in all interest rates. Consolidating your loans at a fixed rate to lock in a lower interest rate is one possibility, but you need to calculate if the longer time frame of such loans and the greater overall interest payments offset the savings from the lower interest rate. (You can't consolidate consumer loans or credit card debt with the student loans.) You can always pay a loan off early once your salary increases.

Now, back to the hectoring. Having less to spend can help you spend less on frivolous things and save for worthwhile causes. Having less will also make you work harder to get more. If you are comfortable, you get complacent.

Don't borrow to buy depreciating assets Almost every consumer product from an iPod to a sofa is worth less the moment you buy it. You are just paying extra for it with a loan. Borrowing, by the way, means taking out a loan, buying it on installment or using your credit card when you don't have the money to pay off the balance. If you can't afford it, don't buy it.

An exception is a car, which may be a necessity that would be out of reach otherwise. One option to consider is a used car coming off a dealer's lease. They tend to be driven carefully and there are a lot of them thanks to recent incentives from manufacturers. Keep the term of the loan short to minimize cost. The latest edition of the Consumer Reports "Buying Guide" lists the most reliable used models, including the best ones for less than $6,000 like the 2002 Saturn SL sedan and the 2000 Toyota Echo. The guide also includes the less reliable models like the 2002 and 2003 Mini Cooper and the Volkswagen Beetle from 1998 through 2004.

Protect your credit Eventually you will have to borrow money for a car or a home. If you want to pay as little as possible in interest, you want pristine credit. So make yourself a credit card company's worst customer: pay your bills on time and never carry a balance. No exceptions. To help avoid temptation, use no more than two credit cards. Try to find one that gives you rewards airline ticket rewards or cash for using it, but still won't charge a fee for that privilege.

Another technique to cut down on incidental expenses is to train yourself to use the A.T.M. only once a month. Take out enough cash to get you through the month, and when you run out of cash near the end of the month, stop spending. Don't grab for the credit card.

Now go out and seize the day. And wear sunscreen.
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Old 06-17-2006, 04:28 PM   #2 (permalink)
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While I understand what the author is trying to say, and I agree in theory with it, remember that you only live once. I'm not saying that it's fine to blow all your cash as soon as you get it, but moderation in everything is key.

Saving is very important, but so is having a life worth living. Just because your parents aren't ever going to charge you rent doesn't mean you should live there until you are 47 years old....

On the flip side, the article does remind us how very expensive daily habits can be.
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Old 06-17-2006, 05:38 PM   #3 (permalink)
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"only 31 percent of workers 18-25 participate in a tax-defered 401(k) retirement plan."

This is the only part of the article I found flawed, because at every job I ever worked at, one had to be 21 years old to start a 401(k). Used to piss me off pretty bad.
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Old 06-17-2006, 10:50 PM   #4 (permalink)
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I've never run into that issue Cookmo - I'm 22 now, but have had a 401(k) with the last three companies I have worked for - started it shortly after I turned 18...
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Old 06-17-2006, 11:38 PM   #5 (permalink)
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Most places had rules about not being able to contribute for the first 6 months to 1 year, but I never heard anything about 18 only.
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Old 06-18-2006, 12:30 AM   #6 (permalink)
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Here is a link to the 401 k code, right under that first paragraph it states the 21 age rule, and the 1 year service rule. Its kinda hard to read, sorry. I don't know if this is an option for employers, or if it can vary by state. I always wondered about it because it seems really stupid.



http://www.law.cornell.edu/uscode/ht...0----000-.html
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Old 06-18-2006, 12:12 PM   #7 (permalink)
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The article really underrates the impact of student loans. If you successful enter a higher-paying profession like IT, maybe you'll be able to put money away and pay off the loans.

But if you're, for example, going into some worthy profession that doesn't pay so well, how the heck are you going to put money away _and_ pay off those loans, much less have something resembling a life much less start a family for the first five-ten years after school? If ever?

Some professions like teaching do offer a pension for those that stay the long haul. But even then I've seen a lot of people leave the profession because even with retirement theoretically covered, there wasn't enough to lead a life, buy a house, raise a family, or anything else.

You can say, well, then, they shouldn't choose to be teachers. Maybe so, but then society's in trouble -- or now only people who are already well off can make a life as teachers in some areas. Which means, again, that society's in trouble.

To paraphrase somebody else, you can't live your whole life for the last 20 years of your life. All the rules in the article are well and good, but the fact is that society has changed over the last 30 years, and the individual has to handle much more by himself or herself than he or she had to. (People had pensions, tuition was close to free or cheap aid was easily available, medical insurance was easy to get) And individual virtue can only do so much to counter society-wide changes.

All that said, those lattes _do_ add up :-).

Last edited by Rodney; 06-18-2006 at 12:24 PM.. Reason: Automerged Doublepost
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Old 06-18-2006, 02:10 PM   #8 (permalink)
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Part of the huge problem people in their 20's face is the high home prices. And everyone wants the newest houses in the good neighborhoods because that is where they grew up and what they are used to. Plus, it is a status symbol, and it impresses people when they see you live in a 2,000-2,500 sq. ft house in a new subdivision. Too bad it costs $300,000-$600,000. How many years would you have to save to be able to afford a 20% downpayment with money left over in case you lose your job or have other expenses.

Then you also have to pay taxes, credit cards, student loans, buy food, rent, insurance, and car expenses. Even though a good house around me still only costs $140,000(which I have 20% for in 2 years of working), if I wanted to move to California, I better save even more in Ohio and then get a good job in CA.
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Old 06-18-2006, 07:31 PM   #9 (permalink)
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Quote:
Originally Posted by Rodney
The article really underrates the impact of student loans. If you successful enter a higher-paying profession like IT, maybe you'll be able to put money away and pay off the loans.

But if you're, for example, going into some worthy profession that doesn't pay so well, how the heck are you going to put money away _and_ pay off those loans, much less have something resembling a life much less start a family for the first five-ten years after school? If ever?

Some professions like teaching do offer a pension for those that stay the long haul. But even then I've seen a lot of people leave the profession because even with retirement theoretically covered, there wasn't enough to lead a life, buy a house, raise a family, or anything else.

You can say, well, then, they shouldn't choose to be teachers. Maybe so, but then society's in trouble -- or now only people who are already well off can make a life as teachers in some areas. Which means, again, that society's in trouble.

To paraphrase somebody else, you can't live your whole life for the last 20 years of your life. All the rules in the article are well and good, but the fact is that society has changed over the last 30 years, and the individual has to handle much more by himself or herself than he or she had to. (People had pensions, tuition was close to free or cheap aid was easily available, medical insurance was easy to get) And individual virtue can only do so much to counter society-wide changes.

All that said, those lattes _do_ add up :-).
I'm going to say by not doing it all instantly.

For many years I didn't have a cell phone or have cable TV. I didn't own a new car. I didn't go on vacations. I didn't go out to dinners. I didn't go to Broadway shows. I rarely would go to the movies.

I monitored my real expenses that were "fixed" meaning I had to keep a roof over my head, transportation to work (car or public transportation,) dry cleaning/laundry costs and food. Those things were non-negotiable and had fixed budgets. I happened to be fortunate to have no college debts as I paid all mine each semester and then dropped out towards the end. I also had no credit card debts.

Anything over that was discretionary funds.

When we decide to buy a home. All the fun things that we did, stopped or were curtailed to the absolute minimum. Eating PB&J for a while and cooking for lunches and dinners was tiresome but a necessary sacrifice.

My personal observation is that people don't want to make many or any sacrifices to get the things that they want. Yes it's hard, yes it takes time, but lots of people don't want to wait.
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Old 06-18-2006, 07:43 PM   #10 (permalink)
 
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Quote:
Originally Posted by Cynthetiq
My personal observation is that people don't want to make many or any sacrifices to get the things that they want. Yes it's hard, yes it takes time, but lots of people don't want to wait.
Accurate observation, Cyn.

I'm almost 27 and can count on one hand the number of people my age (older, actually... most of them 28-29) who own a house. I think I know exactly three people who own their own house, and that's only been in the last year or so for them. None of them went to graduate school... all have been working since age 22 and just barely saved up enough on their own.

Let it be said that I am FAR from owning a house. I would have to make a hell of a lot more financial sacrifices before that happens. Then again, owning a house isn't a real priority right now... but talk to me when I'm closer to 30.
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Old 06-18-2006, 09:34 PM   #11 (permalink)
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Quote:
Originally Posted by Rodney
The article really underrates the impact of student loans. If you successful enter a higher-paying profession like IT, maybe you'll be able to put money away and pay off the loans.

But if you're, for example, going into some worthy profession that doesn't pay so well, how the heck are you going to put money away _and_ pay off those loans, much less have something resembling a life much less start a family for the first five-ten years after school? If ever?

Some professions like teaching do offer a pension for those that stay the long haul. But even then I've seen a lot of people leave the profession because even with retirement theoretically covered, there wasn't enough to lead a life, buy a house, raise a family, or anything else.

You can say, well, then, they shouldn't choose to be teachers. Maybe so, but then society's in trouble -- or now only people who are already well off can make a life as teachers in some areas. Which means, again, that society's in trouble.

To paraphrase somebody else, you can't live your whole life for the last 20 years of your life. All the rules in the article are well and good, but the fact is that society has changed over the last 30 years, and the individual has to handle much more by himself or herself than he or she had to. (People had pensions, tuition was close to free or cheap aid was easily available, medical insurance was easy to get) And individual virtue can only do so much to counter society-wide changes.

All that said, those lattes _do_ add up :-).
I have a fair chunk of debt racked up in student loans. Yet I am paying them down every month even though I'm making half what I will make 2 years from now (once I get into/complete my Master's in Teaching), or even what I could make somewhere else (the job market here sucks). Fortunately I live in a part of the country where cost of living is still relatively low and teaching is (especially in Washington State) reasonably funded. Furthermore, in both Washington and Oregon, teachers are part of the state employee retirement system--so once I'm locked in (and I plan on staying in) my retirement is pretty much in the bag.

My financial priorities run thusly:
1) Pay down my existing student loan debt (while avoiding other debt).
2) Build up a cushion of savings.
3) Save for the future (children, retirement, etc).

After working this year in low-wage jobs--there are a lot of people worse off than teachers, and who do equally noble work.
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Old 06-19-2006, 09:51 AM   #12 (permalink)
 
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seize the day and go read that book.
I'm 26, debt free and semi-retired. 4 years ago, I was 80k in the hole.
I don't always recommend the exact steps he outlines (real estate / MLM) but it's the concepts that win the day for you. Going that route lessens the amount of "suffering" outlined in OP.
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Old 07-05-2006, 05:15 PM   #13 (permalink)
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It all just comes down to proper budgeting. I believe in saving but I also believe in enjoying life. Saving money and building for the future is definitely a top priority, but some things I simply just want (not need) because they add to my enjoyment of life.

It's all about balance. People just need to avoid the excess and stay within their means.
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