Question: Kathy in Springdale: My granddaughter graduated from college. Can you share a few money tips that she might find useful now that she’s no longer in school?
A: Oh, to be a bright-eyed, 20-something again with a future that’s yet to be written. Her whole life is still ahead of her, and from a saving standpoint, she needs to use this to her advantage. Share with her the “Rule of 72” to illustrate the power of compounding and the importance of setting aside money as soon as she can.
Here’s the gist: By dividing an investment’s rate of return into 72, you’ll get a rough estimate for how long it will take for that money to double. For instance, if you assume a 7.2 % rate of return, it will take an investment 10 years to double (72/7.2 = 10). So, let’s put real, basic numbers to this: if she saves $5,000 her first year out of school and can earn 7.2% a year, that $5,000 will have the chance to double five times over the next 50 years – eventually growing to $160,000. If she waits too long to start investing, she’ll lose that advantage of time. And the numbers obviously get bigger the more she saves.
We also recommend the 50/30/20 budgeting rule: She should spend about 50% of her take-home pay on “needs,” like bills and expenses. About 30 percent should go to “wants,” such as travel, nights out with friends, and things like Netflix. And the last 20% should be allotted for savings – either retirement or some other goal, like an emergency fund (she should aim to eventually have enough cash set aside to cover at least three months of critical living expenses). If she is lucky enough to have already landed a job, she should invest at least enough into her 401(k) to get as much match as her company offers.
And we can’t forget about credit cards. They’re not evil – as long as she uses them correctly by paying them off in-full and on time every month and by not using too much of her available credit (aim for less than 30%, or, even more ideally, less than 10%).
Here’s The Simply Money Point: If your granddaughter can establish smart and diligent money habits while she’s young, she’ll be on her way toward a life of financial responsibility and stability.