Last week I watched the episode of "South Park" where Stan takes his $100 check to deposit at his bank. The banker invests Stan's money in a "money market mutual fund that will reinvest the earnings in a foreign currency account with compounding interest and ... it's gone." The banker proceeds to immediately lose Stan's dad's money and another old lady's money all in a matter of seconds. Funny right?
Keeping track of your money is too important to ignore. The cost of not getting your finances together is huge; aside from probably always living in debt with an underfunded retirement account, you'll likely have issues with your spouse (after all, money is a major source of conflict in many marriages). My point - consumer finance is not that difficult and you might as well learn it now so you can benefit for the rest of your life.
The important things: 1) credit cards, 2) mortgages and 3) savings/investments. If you can handle and understand these three areas of your life, you'll be well on your way to a life without having to worry about money.
Credit cards and mortgages are simple. Pick a credit card with no annual membership cost and as low as interest rate as possible. Most companies offer balance transfers and many credit card companies are dying to get your business. Keep your credit card balance manageable and pay more than the minimum payments. It's not rocket science.
Mortgages: now is a good time to buy a house. A mortgage is a loan from a bank to buy a house. The bank holds on to the deed to your house while you pay off your mortgage. You end up paying a ton of interest over the course of a 30-year mortgage. However, mortgage interest is tax deductible. When shopping for a house and mortgage, make sure you can afford the payments and try to lock in a 30-year fixed rate less than 5 percent.
OK now the fun stuff - investing. If you take any finance courses, the professors will teach the "Efficient Market Theory," which basically says it is impossible to beat the market in the long run, and that current stock prices represent all current information in the market. I have some problems with this.
Take a look at the stock market over the last six months. Prices are extremely volatile; when prices move up or down more than 5 percent daily, it's a signal that people (thus the market) have no idea what the stock is worth. Within the last month hundreds of stocks have doubled. My personal portfolio is up more than 130 percent since I started actively managing it in October of last year. I also won the Ball State University investing contest sponsored by the Financial Markets and Service Authority with a return of 104 percent (over a six month time period). Now, my returns are atypical and are a function of hours and hours of research and a little luck, but that doesn't mean you can't beat the market too.
What I'm suggesting is pick out two or three companies that you understand, companies like McDonald's, Wal-Mart or Coach. Do some research on them and start following the stock and news on the company. I only follow around 15 companies. Then just pay attention to the overall market news. Google Finance is a good place to get started. You can also open an account on theupdown.com to manage a fake portfolio of $1 million.
Going back to how investing applies to you, once you get a job, max out your Individual Retirement Account contributions (many times employers will match part of your contribution which is free money for you). Then invest in some type of broad market mutual fund. I would then suggest setting aside 30 to 40 percent of your money to invest in companies that you follow/like, that way your core retirement money will grow with the market and your speculative money will also grow.
Last piece of advice - don't completely hand your finances over to someone else. Take an interest in what your accountant or financial adviser is doing. Many times they will freely answer your questions if you ask. Take an interest in your finances and you'll receive more than just a good return.
Write to Derek at dawilson2@bsu.edu
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