Ask Carrie: Carrie Schwab Pomerantz - The Personal Side of Money

Financial Planning 101: Required Course

August 11, 2010

Dear Carrie,

I'm a sophomore in college and would like to start some kind of financial plan to help protect me in the future. What's the best kind of investment at this stage in my life?

—A Reader

It's encouraging to see someone your age thinking so broadly—and wisely—about their financial future. With current surveys showing that during these challenging times more and more young people are living at home and struggling to become financially independent, you're smart to be thinking about this now.

And you're right on when you say "financial plan." Because protecting yourself financially isn't just about investing. It involves looking at all the pieces of your financial life to make sure they're working together for both the short and long term.

In fact, investing is one of the last pieces to put into place. So let's first go through some basic financial planning steps for your stage in life.

Set Yourself Up
Establishing a practical foundation is step one. It's easier now when your financial life is fairly simple—and will help you manage wisely as your finances become more complicated.
  • Open the right accounts. Shop around for low or no-fee checking and savings accounts with low minimum balances and extras like unlimited checking and free online bill pay. Once you have money to invest, open a brokerage account.
  • Establish—and control—credit. Get a credit card in your own name, ideally with low interest and no annual fee. (If you're under 21, an adult must co-sign.) Then use it so that you establish a credit history. But be careful. Misuse of credit creates many problems, and a negative credit history can follow you for years. For starters, never use a credit card for small purchases, and make a commitment to pay off your balance every month.
  • Create files to keep track of your financial activity. Whether you keep paper or online files, here are some categories that make sense: Bank accounts, Debt, Household Expenses, Taxes, Insurance, Personal documents, Retirement and Investments. Some categories may not apply to you yet, but might get you thinking about the future.
Write Down Expenses
This is just simple budgeting. Write down essentials like rent and groceries and nice-to-haves like entertainment and travel. Now make sure your income, whether it's earned, an allowance or student loans, can cover your needs. Get in the habit of keeping track and making adjustments now, and you'll be less likely to over-extend in the future.

Get Health Insurance
You may be covered by your parents' policy now, but at some point you'll need your own. When it comes to protecting yourself, you can't afford to ignore this. There are many high-deductible, low-cost options available whether through work, school, professional organizations or an individual plan.

Automate Saving
List savings as an essential in your monthly budget. It's an easy way to make saving a habit. It's also easier if you know what you're saving for, so write down some goals, both short and long-term. Even though you're still in school, begin to think about saving for:
  • An emergency fund—Once you're on your own, try to build up at least three months' essential expenses in case something unexpected happens.
  • Retirement—It may seem premature, but start in your 20s to put just 10% of your yearly salary toward retirement—and keep saving at that rate—and you'll be in pretty good financial shape down the road. If you have earned income now, you can open a Roth IRA to get a head start. And when an employer offers a 401(k) plan, take advantage of it as soon as possible.
  • Personal goals—These could be things like a vacation, a wedding, or a even a down payment on a house.
Then put everything on automatic. Link checking, savings and retirement accounts and set it up so that a certain percentage goes automatically into each account every month. The less you have to think about it, the more consistently you'll save.

Begin to Invest
Once you've accumulated some savings, consider investing in a broad based stock mutual fund or ETF. Stocks offer some of the best growth potential over the long-term, and you have the benefit of time. Plus, many mutual funds and ETFs have built-in diversification, which is essential for managing risk. It's easy to research and compare these types of investments online. Be sure to look at risk profile, return history and operating expenses. You might even consider an automatic investment plan that lets you invest a small amount each month.

If I had my way, financial planning would be a required college course. Because if you do it now, you'll not only protect your future, you'll make your everyday financial life easier.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction and investment strategy for his or her own particular situation. Data contained here is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.


The information on this website is for educational purposes only. It is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.


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