Jennifer R. Norman was 16 when she received her first credit card. “It was my freshman year of college,” she recalls. Initially she intended to use the card only to buy books and for emergencies. “But then I began to make purchases that I couldn’t keep up with.” By the time she graduated from Queens College in 2006 she had run up $3,000 in credit card debt, which led to a civil judgment after she defaulted on the payments.
Debts aside, things were going well for Norman in other parts of her life. She was awarded a full scholarship to attend law school at St. John’s University. While she didn’t need to borrow money to cover her graduate studies, she did take out student loans during her last year to pay off the credit card debt and to cover living expenses. “I wanted to concentrate on graduating from law school and passing the bar without having to work or worry about my lack of income,” explains Norman. After law school, she turned down a number of lucrative employment offers to take a public defender position at Queens Law Associates PC. Her annual salary is about $55,000.
Norman’s debt struggles are typical of many young college graduates. The misuse of credit cards on university campuses has become so problematic that last year the federal government enacted a law banning companies from issuing credit cards to anyone under the age of 18 without an adult cosigner. Recent studies show that the average college student graduates with about $4,100 in credit card debt and $24,000 in student loan debt. Norman has $19,000 in student loan debt, toward which she pays $300 a month (at an interest rate of 6.8%).
Over the past two years, the 27-year-old attorney has taken great pains to rebuild her credit. She uses a secured credit card, which has a $700 credit limit. Norman plans to apply this year for a traditional unsecured credit card that may offer her a higher limit and lower interest rates and fees.
While Norman’s debt problems aren’t unusual among twenty-somethings, her skill for investing money is uncommon for someone her age. In 2008, with the help of her uncle who is an economics professor, Norman invested $10,000 of her savings in a handful of carefully chosen stocks. “I’ve made a few great moves and a few not-so-great moves, but I am learning more and more every day about how to research my investments, how to invest intelligently, and how to be patient when investing long term.” To date, her individual stock portfolio is valued at $14,000; she has another $13,000 in a money market account.
In spite of her less-than-perfect credit history, Norman realizes that she is ahead of the curve compared with many of her peers who have newly minted graduate degrees and careers. “I have relatively minimal debt, a secure job that I love, and the potential to realize continued financial success with few setbacks.”
Jennifer Norman is on the right path to accumulate wealth, but she needs to diversify the types of investments she makes. Doing so will help maximize her returns and reduce her tax obligations. To help Norman get to the next level, black enterprise and Ivory J. Johnson, director of financial planning at Scarborough Capital Management, devised the following strategies to help Norman manage her finances and grow her assets.
• Use digital apps to budget. Norman often finds herself halfway into a pay period clueless about where her money went. She estimates that her total monthly expenses are $1,800 and her take-home pay is $2,800. Plus, she brings in an average of $1,000 a month doing private legal work. Between her regular paycheck and income from the side gig, she should have nearly $2,000 in discretionary income.
Norman needs to create a budget and follow it, says Ivory J. Johnson. Within that budget, she needs to include a line item or set amount that she will contribute each month toward savings and investments. There are dozens of highly rated budgeting apps she can use. For starters, Johnson recommends iBearMoney, Toshl, HomeBudget, and ProOnGo.
• Open a SEP IRA account. Norman needs to save money in a tax-efficient way, says Johnson, especially since she’s single with no children and lives in the high-cost New York metropolitan area. Norman can continue saving for retirement in her existing 401(k) and use the $2,000 contest winnings to open a SEP IRA to further diversify her investments which will allow her to put aside 20% of her net self-employment earnings. If, for instance, she nets $20,000 from her private practice, she can contribute $4,000 to the SEP and reduce her overall tax liability for that given year. “Invest in some alternative asset classes like precious metals or gold mutual funds, which don’t move in concert with the stock market,” Johnson advises. “Add mutual funds to the asset mix to help balance out the individual stock portfolio.”
• Increase 401(k) contribution. Norman has been contributing only 5% of her salary to her 401(k) plan since she began working in August 2009. It’s currently valued at $2,000. Johnson recommends that she increase her contribution to 10% (or $1,800 a year) and focus on investing in small-cap and mid-cap funds, since the companies within those categories are taking advantage of new technology, tend to be more innovative, and are more nimble in tough economic times than larger companies, explains Johnson.
• Diversify and safeguard equity portfolio. Norman’s stock account consists of six companies mainly in biotechnology and media/entertainment industries. Johnson suggests that Norman broaden her holdings by looking into agricultural stocks, taking advantage of rising food prices and changing global demographics. Although Norman has done a good job building a stock portfolio with the help of her uncle, she also ought to consider mutual funds as a less risky, more diverse way to invest. And she needs to protect her portfolio from possible future loss. Johnson suggests that she set sell-stop orders on her individual stocks to prevent deep, sudden losses. For instance, she can place an order to automatically sell a stock if its price drops 10%.
• Rebuild credit. Norman’s current credit score is 690. Once she has established a new credit history with a new card or two, and begins to pay those bills on time, her credit score will improve into the 700s within a few years. “Call the three credit rating companies (Equifax, TransUnion, and Experian), and get a free credit report for review,” says Johnson.