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College Graduates Strive for Fiscal Fitness
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By
Patrick Badgley
11 March 2004
Paying Off Credit Cards and Student Loans Can Compete for Priority With Comfortable Lifestyle
(U-WIRE) AUSTIN, Texas – Ruben Guardiola considers himself like the typical person just out of college. He owes money on credit cards with annual percentage rates (APRs) ranging up to about 21 percent and has to pay back thousands in student loans.
But unlike some of his peers, Guardiola is working out a plan that hopefully balances paying off debt and purchasing nice items now with having a comfortable nest-egg to fall back on later.
"Once I started working full time, my wife and I sat down and said, ‘Where am I getting hit the worst?’" said Guardiola, who went on to work at CyberTrader Inc., a direct-access broker specializing in electronic trading, after ending his time as a full-time college student in July 2001. "The interest rates on student loans are only 6, maybe 10 percent. I have a credit card with a 21 percent rate, so I’m trying to eliminate high-interest debt first."
Graduates Torn Between Spending and Investing
As recent graduates begin receiving their first real paychecks, and the time rolls around for them to decide between enjoying their first new car and a fancy apartment or putting money into a 401(k) retirement plan, the graduates have to weigh which luxuries are needed and which are merely wanted, says Karrol Kitt, an associate human ecology professor at the University of Texas-Austin. Kitt teaches a class in personal and family finance.
"One of the things we’re finding is that when some graduates leave school, they say ‘I’ve suffered so long, now it’s time to get something for myself,’" Kitt said. "They’ve been living with their parents, and yes, [their parents] have nice things, but they’ve been married for years and didn’t start out with those things."
Because some employers match a percentage of the dollar amount employees put into their retirement funds, not taking advantage of such a plan would be like refusing free money, Kitt said.
But Kitt said even those whose companies don’t supply a 401(k) plan or who are self-employed should be looking to the future by putting money into an individual retirement account, on which all investment earnings are tax-deferred until the user receives distributions from the account. She also noted the Roth IRA, on which all earnings are tax free when the holder or his or her beneficiary withdraws them.
Credit Card Debt Can Stall Retirement Fund Investing
College graduates have learned that while choosing to pay off high-interest credit cards or other costly debts may be a better idea than putting more money than is matched in a retirement fund, shooting for a luxurious lifestyle on a limited budget probably doesn’t outweigh preparing for the future.
"You need to have the basics: shelter, transportation, food and clothing," Kitt said. "How nice those things are is the question."
Guardiola faced just that.
"When I first got a job, we got a new car. You gotta live a little bit. The question is whether it’s a Corolla or an SUV," he said. "I knew what I needed, what I wanted; I just needed to fit what I wanted in to a budget."
Guardiola said that while he sometimes doesn’t plan his finances as well as he would like, he does set aside as much as his company will match for his retirement fund each paycheck. He also hopes to become comfortable enough to invest in the stock market and in mutual funds sometime in the future. That, he says, will probably come once he doesn’t owe money on his credit cards and has to deal only with student loans.
Kitt said some credit cards have APRs that are higher than what investments would return, meaning those struggling with debt should wait to become too involved with the stock market and "pay off debt until it hurts."
Guardiola said he could have avoided that wait had he been more strict with the credit card purchases he made while in school.
"Dad told me before I went to school that I need a credit history; now, 16 cards later…" he says. "Now, it’s going to be five to 10 years before I have a profitable net worth."
Copyright ©2003 Daily Texan via U-Wire
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