Advice for young college student

[mcdevin1970]

Hello,

I want to get your input on what advice I should give my two sons as my oldest is first year of college and youngest is a junior in H.S.

What type of investment accounts should i set up for them so that they can be in the best position possible in the future. Currently they both work at a grocery store and a very little amount comes out of their check and into a 401k. I do have about 15k in an account through Edward Jones for both of them.
My biggest concern is when they get their first real job out of college...what would be your recommendations on monthly contributions and to what type of accounts.

Sorry, I am not a wise investor, but reading here made me realize this forum has a wealth of knowledge that I would like to tap into.

Thanks in advance for any advice!

 

[green night]

Advice ...

I think you should give them some solid advice (like always be saving in tax efficient accounts) and let them do the leg work, etc. They'll learn more and take a more active engagement in their accounts.

Some general topics to cover with them of the top of my head.

1) Spending
2) Credit cards / debt
3) Compounding interest (rule of 72, if you don't know it, google it)
4) Tax Planning
5) Retirement Planning - 401Ks, IRAs, Roths

 

[Newventurer]

what I did to introduce my similarly aged son to the markets was to 'front' him $1000 that he could invest any way he chose and suggested sites like marketwatch where he could access data about specific investments.

The $1000 was actually a subset of my IRA and I established a spreadsheet based on the trades that he made, breaking out the commissions so he could see what things cost. The deal was he could keep anything over the $1000 and had to pay it back (ok, I guess I was teaching him about margin investing, accidentally).

I was impressed with his interest and diligence and the way he stuck to his choices based on his knowledge of the investment he was making. At different times he chose Google and Micron and did quite well. He had a target number to exit and stuck with it.

He made $1000, paid me back, and put the $1000 in a Roth IRA, spread over 3 investment choices he had researched.

Just setting up a mock portfolio with 'play' money would offer the same learnings.

It was fun and gave us something in common to discuss.

Best wishes.

 

[timwalsh300]

...let them do the leg work, etc. They'll learn more and take a more active engagement in their accounts...

Agreed.

As a college student, I remember money being very abstract. A scholarship and parental support covered my basic needs. I vaguely understood that money could be either dangerous (e.g. spending/debt) or powerful (e.g. compounding savings), but I didn't care to get into the details. I just tried not to buy much, and I avoided anything more legally or financially sophisticated than a checking account. That didn't change until I approached graduation. By necessity, I took a sudden interest in sorting things out. Taking a personal finance course during my final semester was a great starting point. Then I learned 100x more by reading online. But most advice would have been wasted up to that point.

So for now I would limit advice to the simple stuff that will keep them out of trouble: Beware of debt. Save part of every dollar you earn. Don't let anyone sell you a product or service. Beware of signing or doing anything that will be difficult/expensive to undo.

As opportunities arise (e.g. they need a car, insurance policy, apartment, budget, plan for their savings, etc.), I would talk to them about what to look for, what to avoid, what is reasonable and why... but I would definitely have them take the lead and get the experience.

As far as investment options, specifically, I steer everybody toward Vanguard where everything is relatively low-cost. In an employer sponsored plan (e.g. 401k), I would simply look for funds with the lowest expense ratios. I assume that Edward Jones is a bad deal for investors, offering only expensive products.

Tim

 

[dvalley]

Keep it real simple.

Save 25-30% of their paycheck. This should go into a 401k and then a ROTH IRA.

If they have debt, pay it off ASAP.
If they don't have debt, don't get into it.

 

[LOL!]

I couldn't invest/save any money until I was 28 years old and that "delay" didn't hurt me.

For my own kids, I have been able to give them enough money each year equal to their part-time earnings so that they can put it all in a Roth IRA. That way, they have an IRA going while still being able to take their earnings to pay for [-]booze, drugs, and music[/-] college expenses. I have them invest in a fund of index funds in their IRAs.

I would get them away from Edward Jones as soon as possible. Places like that really suck your money slowly away from you. Seriously. Get them out of Edward Jones.

 

[BTravlin]

Just prior to logging in I was thinking of starting a similar thread since my son will graduate from college this May. Thanks to the OP for saving me the trouble.

I believe getting a financial education while young is more important than ever.

Adding onto the good advice offered above, I would suggest telling them to evaluate and set their life goals and then learn to budget to help achieve those goals. Constantly reevaluate their goals and adjust as needed.

 

[BigBangWeary]

I agree with dvalley, use the KISS strategy here. Students are often too busy, too distracted, etc. to get into the details of investing strategies. I would say debt avoidance/reduction and learning to put away 15-20% as a habit are the two most important. Hopefully after all of the wild oats are sown, and qualifications are earned, they will be in a position to need to know the finer details of asset allocation/taxation/re-balancing/investor psychology, etc.

In the end, what gave us the advantage was simply building the automatic saving muscle. After college, our earnings obviously went up a lot, but getting us to stop putting away our usual percentage would simply not have crossed our minds at that point. It had become second nature. Automatic.

 

[Hermit]

My son is 22 and in college. He is absolutely convinced he is going to get rich in derivatives. Trying to coax him into the concept of putting some money into a low cost index fund or 401k when he is employed, but he thinks he has plenty of time to go that route in the unlikely chance that he is not fabulously wealthy by 35 or 40. Sometimes you just gotta love 'em for who they are.

 

[WM]

You might check out Ramit Sethi's book "I Will Teach You To Be Rich." It's targeted at 20-somethings and has very good basic financial advice about credit cards, debt, investing, you name it.

 

[LOL!]

I made my daughter open a Roth IRA. It is invested in a fund of index funds. When she shows me proof that she has contributed to her Roth IRA and bought shares of this fund, then I give her the equivalent amount of money. That is, I pay for her Roth, but not until after she contributes to it. If she wants the free money, she has to come up with the cash up front first.

 

[MRG]

Get several copies of The Millionaire Teacher, for them and you. LOL gave you some great ideas. Ed in St. Louis, is not your friend. Teach them that lesson, it's in the book too.
Best wishes,
MRG

 

[Ginny]

I introduced my then 14 year old to a stockbroker and he has made his own investment choices via a Roth since then and he is doing a good job. He will know what to do with my money at Vanguard when I die.

 

[liveaboard_frank]

Another vote for Ramit

You might check out Ramit Sethi's book "I Will Teach You To Be Rich." It's targeted at 20-somethings and has very good basic financial advice about credit cards, debt, investing, you name it.

I've been following Ramit's site for 10 years or more (time flies!). Great advice, especially if you can't handle a lot of dry material. I've been following his advice about index funds and automating savings. Some of the easiest strategies to apply if you're just starting out.

 

[panacea]

I made my daughter open a Roth IRA. It is invested in a fund of index funds. When she shows me proof that she has contributed to her Roth IRA and bought shares of this fund, then I give her the equivalent amount of money. That is, I pay for her Roth, but not until after she contributes to it. If she wants the free money, she has to come up with the cash up front first.

This is great. My 17 year old son will start his first job this summer and I plan to also introduce him to a Roth IRA.

My approach so far for teaching basic money management has been largely by example but also by bringing them along for the ride:

1. Show them my paycheck
2. Show them how much comes out for taxes
3. Show them how much comes out to fund my 401(k)
4. Show them how much ends up in the checking account
5. Show them the amount that is automatically transferred to Fidelity for a rainy day fund, IRA investing, other investing, etc.
6. Show them how I pay the bills online with what's left.
7. Show them the spreadsheet that projects when we'll be financially secure based on the amounts we're saving.
8. Don't buy things just because we can afford it (they know how much we make and know we could spend more than we do).
9. Be very thoughtful and deliberate about large purchases.
10. Drive our cars for a really long time, until it looks like we can't afford to drive nice cars.
11. Open savings accounts for them.
12. Open a Fidelity (UTMA) brokerage account for them (maybe I just have had them do more of the work themselves but they were pretty young) and give them guidance as to how to invest their babysitting and gift savings (all free ETFs).

That kind of stuff. I think it's working as well as can be expected at this point. At 14 and 17 they both love to save and hate to spend. They like to invest and don't like putting money in the bank savings account. I think they understand taxes a little bit... they probably think it's just a rip off at this point.