Author Topic: College Student on Financial Aid Investing for Retirement at 18 Years-Old?  (Read 2164 times)

hadabeardonce

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I put the idea of investing for retirement into my niece's brain. She's 18 years old, no debt, no credit cards, no loans and has a job as a student worker($14/hr - 19hrs/wk max) where I'm employed. She's also receiving financial aid($1400 in 2 disbursements) from the college per quarter, which is deposited into a regular ol' checking/savings account. This is the basic advice I've given her so far:

1) Sign up with Mint
2) Spend less than you make
3) Set aside at least 10% of your income
4) Once you have an extra $1k, put it in a Roth IRA with Vanguard in VTTSX or VGSTX

I'm a little at a loss with what else to say to her since she's so young. The only ongoing expense she has at the moment is gas for her car, and she probably fills up once per month. I would suggest getting a credit card to build up her credit rating and have the extra protection you don't get with a debit card, but I don't know which one to start her out with... Gas stations that provide credit cards are still more expensive than Arco. I don't really want to get her a store card, because I feel like that would encourage purchases. Maybe just a Chase Freedom, if she can qualify? At least I can set that to auto pay in full.

What amount should I recommend she have in her bank account as a safety net while she's in college and living with family?

Maybe for step 5 I'll have her create her own account on the forums :)

Vagabond76

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No one has given me a good reason why young people need to "build their credit." That seems to be holdover thinking from 30 years ago.

Credit cards will always be easy to get if one has income and no debt.  It is tougher for an 18 year-old college student with no income, but if she has regular employment or once she is out of college.

ender

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No one has given me a good reason why young people need to "build their credit." That seems to be holdover thinking from 30 years ago.

Credit cards will always be easy to get if one has income and no debt.  It is tougher for an 18 year-old college student with no income, but if she has regular employment or once she is out of college.

For what it's worth, there are a lot of reasons to have great credit (rental applications and mortgages are probably the biggest two).

Given that it's trivial to get a 750+ credit score over time, it seems like a good enough idea to do, so if you want a mortgage at some point you auto qualify for the best rate.

But that's if someone is financially intelligent and not prone to ending up paying a stupid tax over it. Only OP knows about the niece's likelihood there, though keep in mind most people don't plan on racking up CC debt.

englishteacheralex

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I think a credit card for a college student is just asking for trouble. Finances are very nebulous at that stage in life; most income tends to be irregular and highly sporadic, "adulting" hasn't really taken hold yet..."building credit" doesn't seem necessary until later.

We love our awards cards and put every possible expense on them, but we also keep a meticulous budget and have highly dependable incomes. There is no way we wouldn't pay our cards off every month; we treat the money we spend on them as cash and only use them for the airline miles.

I think all the habits mentioned in the OP sound good; why not wait until she's out of college and has a steady job to start "building credit"? Developing good financial habits in college are actually kind of the backbone of "good credit" philosophically; you need the baseline skills of budgeting and living within your means before you start using credit/debt responsibly. 

Vagabond76

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No one has given me a good reason why young people need to "build their credit." That seems to be holdover thinking from 30 years ago.

Credit cards will always be easy to get if one has income and no debt.  It is tougher for an 18 year-old college student with no income, but if she has regular employment or once she is out of college.

For what it's worth, there are a lot of reasons to have great credit (rental applications and mortgages are probably the biggest two).

Given that it's trivial to get a 750+ credit score over time, it seems like a good enough idea to do, so if you want a mortgage at some point you auto qualify for the best rate.

But that's if someone is financially intelligent and not prone to ending up paying a stupid tax over it. Only OP knows about the niece's likelihood there, though keep in mind most people don't plan on racking up CC debt.

Not many 18 year-old college students are applying for mortgages. As a multi-unit landlord that checks credit on every tenant, I have absolutely no problem renting to someone with a "0" credit score. That means I am not competing with First National Bank for the rent payment.

ender

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Not many 18 year-old college students are applying for mortgages. As a multi-unit landlord that checks credit on every tenant, I have absolutely no problem renting to someone with a "0" credit score. That means I am not competing with First National Bank for the rent payment.

Sure, but if that 18 year old can spend almost no effort and set themselves up for an easy mortgage process later?

And again I'm not saying anyone should get a credit card, because many people end up with stupid tax. But if someone is mature and responsible? Different story.

hadabeardonce

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It probably depends on the teenager, but my niece has been raised to be frugal.  She's had a teen checking account for a while, but the debit card attached to that account did have a $40 limit that was imposed by her mom. I don't get the impression that she'll immediately go wild with a credit card. I had a Discover Card when I was 18 or 19 and always paid it off in full, which was a habit my parents taught me. All of my purchases weren't incredibly logical at the time, but I didn't go into any debt or pay interest. (Overdraft fees on a checking account could be even worse than paying a small amount of interest - if she gets to that point.)

My main concern with using a debit card is the lack of protection. Chase has always provided me with extremely vigilant fraud monitoring. Suspicious transactions aren't approved and I'll receive a phone call, text and/or email within seconds of an attempt to use my card on something questionable. I haven't seen the same kind of attention to detail from banks and normally while a transaction is being disputed, that money won't be in the account for at least a few days.

I feel like I can lead by example when it comes to financial education. I try to be pretty transparent with all my data - she's seen my Mint account, my retirement plan, and my income is public record since I'm a government employee. My wife and I talk about spending, income, paying bills and the pitfalls of ongoing expenses in front of her often.

---

Here's what I'm thinking my retirement account advice for her will be today:
1) Maintain $1k in the checking account (for paying for classes, books, gas, Cheetos, etc. [it's a community college])
2) Once you have $2k, put $1K in a Roth IRA with Vanguard
3) Contribute a minimum of 10% of any income(paychecks/fin aid) to that Roth IRA (ideally a higher %, but 10 is a good start)


MDM

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...getting a credit card... [and] set that to auto pay in full.
That's a fine idea.

Quote
What amount should I recommend she have in her bank account as a safety net while she's in college and living with family?
Enough to pay the monthly credit card charges.

Depending on her major and thus where she might go for summer jobs and full time job interviews, having a credit card to pay for reimbursable expenses is a good idea.

Getting her used to the idea that "of course you pay the balance in full every month" will have lifetime benefits.

DrF

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An 18 year old can get by with much less than $1000 in a checking account. Heck, there were months in college when I had less than $10 in my checking account. Tell her that she should keep $250 in a checking account, and that if she ever needs more than that for an emergency she can come to you for a 0% loan (or whatever you want to negotiate).

For credit: you can add your niece as an authorized user to one or more of your and your wife's credit cards. You never have to give your niece the card, and the card will be mailed to your address only.

Purchase protection: You're niece isn't doing enough purchasing at this point in her life to need anything like this. If someone steals her bank info there are laws that protect her from the loss.

IRA: The Roth IRA is probably the best way to go right now, she probably will pay $0 taxes, so no need to use the Traditional IRA. Once she starts paying taxes, she may want to stop contributing to a Roth and switch everything to employer pre-tax savings (401k or similar) or open a Traditional IRA. I would recommend opening the Roth IRA instantly. She can start by investing in as little as 1 share of any of their ETFs. From Vanguard: "*The minimum initial investment for Vanguard Target Retirement Funds and Vanguard STAR Fund is $1,000. A $3,000 minimum applies to most other Vanguard mutual funds. For ETFs (exchange-traded funds), the minimum initial investment is the price of 1 share."
Then she can set up an auto investment option so that the money gets whisked away to Vanguard each pay period.

Goldielocks

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If she can get a subsidized loan, with no interest until graduation (not defferred, just no interest), then there is a great opportunity if she does not spend it...

(My sister did this)

1) Get federal loans for $10k  (subsidized)
2) Only use $2k of the loan, pay for everything else through part time jobs, savings, frugality, sudden change to living at home, etc.
4) Invest $8k in a money market / fixed income.  (available "just in case")
5) Graduate with decent marks
6) Have $3.5k forgiven for graduating with decent marks / government happiness / other
7) Repay $6.5k loan right away, before interest starts...
8) Keep the $1500 and 2 years of interest for yourself...


hadabeardonce

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Re: College Student on Financial Aid Investing for Retirement at 18 Years-Old?
« Reply #10 on: October 13, 2016, 03:19:11 PM »
An 18 year old can get by with much less than $1000 in a checking account. Heck, there were months in college when I had less than $10 in my checking account. Tell her that she should keep $250 in a checking account, and that if she ever needs more than that for an emergency she can come to you for a 0% loan (or whatever you want to negotiate).

IRA: From Vanguard: "*The minimum initial investment for Vanguard Target Retirement Funds and Vanguard STAR Fund is $1,000. A $3,000 minimum applies to most other Vanguard mutual funds. For ETFs (exchange-traded funds), the minimum initial investment is the price of 1 share."
I really appreciate the ETF tip. That seems like the perfect way to get someone started who doesn't have pre-existing savings or a large income. *two thumbs way up*

Here's my thinking behind maintaining $1K in checking - her expenses:
$400 Tuition per quarter
$400 Books and materials per quarter
$150 Gasoline for 4 months

I paid for her first quarter of classes. Her parents are thinking of making her pay for car insurance, which would probably kill her financially. (If I were her I would sell the car, but that would probably piss off her mom and biological father[it's a complicated modern family situation] in a huge way. They each ponied up $2k to buy it.)

If she can get a subsidized loan, with no interest until graduation (not defferred, just no interest), then there is a great opportunity if she does not spend it...

(My sister did this)

1) Get federal loans for $10k  (subsidized)
2) Only use $2k of the loan, pay for everything else through part time jobs, savings, frugality, sudden change to living at home, etc.
4) Invest $8k in a money market / fixed income.  (available "just in case")
5) Graduate with decent marks
6) Have $3.5k forgiven for graduating with decent marks / government happiness / other
7) Repay $6.5k loan right away, before interest starts...
8) Keep the $1500 and 2 years of interest for yourself...
Your sister is cool *two thumbs up*

I'm not sure we're as cool. That scenario could be iffy to pull off.

Goldielocks

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Re: College Student on Financial Aid Investing for Retirement at 18 Years-Old?
« Reply #11 on: October 13, 2016, 03:36:39 PM »
As long as you don't spend the money, and can access it within 3 months of graduation, there is minimal risk to "pull it off", even if it nets zero due to no loan forgiveness...

The challenge is when the darling starts to buy $20 lipsticks with it.