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Retirement is usually one of the furthest things on the minds of college students and new graduates. You got bills to pay, including possibly students and car loans. You might think that you’ll pay down your debts first, buy the house, and then save for retirement. After all, you should be making a lot more money than you’re making now so you can catch up. Right? Don’t become your own worst enemy.

The average credit card debt for college students is between $986 and $2700. With credit card rates in the upper 20% and higher, it is smarter to pay this off first. The problem is that most people use this debt as a crutch and delay starting their retirement by years. There are other expenses that come up and starting to save for retirement becomes next year’s goal gain and again. There’s a better and relatively pain-free way to get ahead now and in the future.

Once you have paid your high interest debt off; put a chunk of your money into a retirement fund. How much can you put into it?

MSN Money offered these facts:

• 401(k)s allow you to save up to about $15,500 a year (the amount increases each year by an index tied to inflation) in pretax income. You won’t pay taxes until you start drawing on the money. Most employers will match a portion of your contribution. Similar plans exist for employees of small businesses and nonprofits, the self-employed and public employees.
• You can place up to $4,000 in pretax money a year ($5,000 a year starting in 2008) into an IRA.

The first thing you noticed was the $15,500 limit on 401(k)s. Most working college students don’t make $15,000, how could they possibly put that into retirement. The answer is that they wouldn’t (unless you have another source of income that pays your expenses).

Remember pay off your high interest debts off first. You can’t grow your money until you’ve gotten out of the quick sand.

Just put 5- 10% of your paycheck into a retirement account. You can always increase the amount as you make more money. If you have a 401(k) policy that matches, then make the enough of a contribution to maximize that free money.  If you don’t qualify for a 401(k) at work, open an IRA. Just start getting into the habit of saving and planning for the future. I get benefits (finally)starting next month at my job and I will sign up for the 401(k). I’ll also continue to put something in my IRA.

How many people already have retirement savings started? How do you do it? Is it by percentage or is it a fixed amount?

Photo Credit:  chefranden

After reviewing which posts were popular on my site last week, I noticed that starting an IRA was number one. I think one deterrent for people investing is the terminology associated with that. I decided to help out by putting out some quick posts demystifying financial lingo. Today’s term is expense ratio.

What is the actual definition of an expense ratio? Here’s how Google defines it:The percentage of a fund’s assets that are used to pay its annual expenses.

The percentage of total investment that shareholders pay annually for mutual fund management fees and operating expenses.

A comparison of the costs of owning and operating something to its potential gross income.
 

What does that mean for me as an investor?

This percentage is taken back by the fund as a compensation for running the fund. It covers operations and management fees. Motley Fool points out that this money comes out of your return. Another interesting point that the Fool.com site brought up:

Because the average large-cap value fund charges 1.17% more than the index, it has to outperform by at least that much to create value for investors — and more (maybe a lot more) if sales charges are involved. That’s a high hurdle for fund managers, many of whom trip and injure their clients’ portfolios in the process.

What’s a good ratio?

In generally it appears that lower is better, but you have to factor it the performance of your fund. After all what good is a lower expense ratio if your fund does poorly?

Where can I find out more?

There are a lot of sites that have financial information. Try exploring and seeing which appeals to you personally. I recommend these:

• Yahoo Personal Finance’s Main Page
• Vanguard’s Planning and Education Section
• Fool.com    Retirement Section
• Ramit Sethi has a great article warning against expensive funds versus index funds.
• J.D. offers information on IRAs.
• Pinyo gives his initial investment mistakes and how to avoid them.

Photo Credit:  Aaron Edwards

Photo Credit: PPDigital

College students who work may sometimes have a job that offers a 401(k) with a match. It’s easy to sign up and even easier to contribute. If you’re in this category, please consider yourself fortunate, as your employer has made it easier for you to save for the future. Many times, however, college students do not have opportunity, as their status as employees (part-time/intern) doesn’t allow them to participate. Does that mean you should wait until after you graduate before you get started? I don’t think so, as it generally accepted that the sooner you start the better compound interest will treat you. Having an Individual retirement fund (IRA) can help get started and when you get a job after graduation, supplement your retirement strategy.

There are many excuses that people make, but the truth is IRAs are doable.

It’s very complicated to start an IRA.

Banks, brokerages, and credit unions offer IRAs. There a wealth of options. The good news you can compare and see who offers the best deal. Some charge a flat fee for the year, some take a fee for each transaction made, others can take a percentage, and some do all of this. The idea is to keep your fees as low as possible and get the best performance. After all, you’re a college student with a limited amount of cash. Once you find a company that offers you what you want, you fill out an application to open an account. It’s not that complicated. It took me about 10 minutes to fill mine out.

I need a lot of money to start an IRA.

Not true, there are companies that offer funds for $250 or less to get started. American Funds, for one, has no minimums on some of their funds if you automatically deposit into the account.

My paycheck will be sucked dry by my retirement contributions.

If you have your contribution automatically deducted from your banking account, you can catch a break on the minimum. Some offer $50 monthly minimums. That’s just $12.50 a month! (By all means, if you can put more in, then do so.)

I have to be a financial genius to pick the right retirement portfolio.

Front-load, back-loads, expense ratios, and other terminology seem complicated. It’s not really once you get familiar with the terms. Wikipedia and Fool.com can guide you when you come across something unfamiliar.

Front load is the percentage you pay when you first buy the mutual fund. Back load is when you sell it off. Expense ratios is how much you’re charged for having this fund. It pays for the paperwork mailed out, salaries, etc.

There are a lot of realy good articles if you want to learn more. Here’s are some of my favorites.

• Which IRA is the Best Deal? (Get Rich Slowly)
• Save Now, Retire Rich (Free Money Finance)
• How Much Money Do You Need For Retirement? (The Simple Dollar)
• Determine your Retirement Needs in 3 Easy Steps (Moolanomy)

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