Eryk Williams is a 28-year-old college student whoâ€™s surviving off of his military disability benefits while still trying to save money and build assets. Sierra Brown, 24, is conflicted about whether to take out more loans to go to a better university rather than borrowing lessâ€”or noâ€”money to attend a lower ranked institution. First-time investor, 34-year-old Selena Ruth Smith wants to know more about how, and where, to invest her funds.
These are just a few of the pressing financial issues black enterprise uncovered after surveying be Nexters: 21- to 35-year-olds. When we reached out to young readers and asked them to voice their top concerns via Facebook and Twitter, student loan debt and investing ranked high on the list.
Some readers have even amassed up to $100,000 in debt to attain masterâ€™s and doctorate degrees. College seniors who graduated in 2009 carried an average of $24,000 in student loan debt, up 6% from the previous year, according to The Project on Student Debt. These factors may partly explain the lower rates of investing among African Americans. According to the 2010 Ariel Black Investor Survey, since 1998, African Americans have consistently saved and invested less than whites of similar income.
But donâ€™t get discouraged; time is on your side and so are we. Thatâ€™s why Black Enterprise asked our team of experienced financial advisers to help answer some of your most-asked questions about wealth building. We talked to Ryan Mack, author of Living in the Village: Build Your Financial Future and Strengthen Your Community (St. Martinâ€™s Griffin; $14.99), Zac Bissonnette, author of Debt-Free U (Penguin Group; $16), Dr. Herm Davis, co-author of College Financial Aid for Dummies, personal finance coach Dorethia Conner, and financial adviser Chris Long.
Q: How do I jump into investing while juggling my financial obligations as a full-time college student?
Mack: With your future income being such an uncertainty I wouldnâ€™t advise you to invest in stocks only to have you liquidate your positions upon graduation when you find out what your true financial picture is (which for many graduates today is filled with a lot of debt and not as much income as anticipated). Start creating mechanisms that increase your knowledge and exposure to this field. You can start your own investment awareness club and check out websites that can increase your knowledge such as www.moneymovement.org, simulator.investopedia.com, www.bloomberg.com, and finance.yahoo.com. Also, consider finding mentors who can assist your growth.
Q: Is it a good idea to consolidate my loans?
Bissonnette: Consolidation doesnâ€™t really do anything. Itâ€™s almost like shifting your food around on the plate. It just puts all your loans in one place so youâ€™re not paying a bunch of different creditors. The best way to repay your student loans is by figuring out how you can cut costs, increase your income, and put the excess toward the debt. (Visit www.studentloans.gov)
Davis: It may not be wise to consolidate all your loans especially low-interest federal loans (i.e.Perkins).
Q: Iâ€™m a first-time investor and not sure whether I should invest in bonds or stocks?
Long: It doesnâ€™t need to be an either/or decision. For most people your age, stocks are a better bet because they have a higher long-term return. You could invest 80% of your money in stock funds and 20% in bond funds. For stock funds I really like no-load, low-cost index funds. Make sure to include international stocks in your mix. If you are just starting out, and want to keep it simple, you could invest in a U.S. stock index fund, a bond index fund, and an international stock index fund. Or you could choose a target retirement fund that has a predetermined mix of those three types of funds based on your age.
Conner: Visit www.morningstar.com or www.hoovers.com to learn about the companies held in the funds you consider.
Q: How much money do I need to start investing?
Mack: Assuming that you have already eliminated any debt and have a stable savings strategy, all you need is a trickle of dollars to start investing. If you go to www.sharebuilder.com youâ€™ll see a great resource where you can start small and build, but again, make sure that you have built a solid foundation before you invest in the market including the following: Do you have a working budget? Have you eliminated your credit card debt? Is your FICO score above 700? Do you have a proper insurance plan in place? Do you have six to nine months of living expenses saved? Is your estate plan in order? Are you investing regularly in your [employerâ€™s] retirement plan at least up to the company match?
Q: Investing seems so complex. I get overwhelmed with just the basics. How can I create a financial blueprint?
Long: Save six months of living expenses in an emergency fund. (You can use an FDIC insured high-yield savings account.) Have this money automatically transferred out of each paycheck. Build this amount over the next two years. If your employer offers 401(k), 403(b), or 457 plans with a match, invest enough to get the full match. (A common match is $.50 for each $1 you invest on the first 6% of your salary.) If your employer offers a Roth option, use it. This means you wonâ€™t get a tax break now but the money you invest will grow tax-free. If your employer does not offer a match, or a Roth option, open a Roth IRA first. (You can start it with as little as $50 with T. Rowe Price, www.troweprice.com).
Q: How can I maximize the interest Iâ€™m getting on my savings and investments?
Mack: For the best savings rate you can go to www.bankrate.com. For investments, rates of return depend upon your asset allocation. The more risky your allocation of assets, the higher the potential returns in your portfolioâ€”but also the greater the potential risk of loss.
Long: The key is finding the risk/return balance that fits your needs. That will determine about 90% of your return. The other 10% is driven by investment costs, which you can control by investing in low-cost index funds.
Mack: There are only three things we can do with moneyâ€”spend, give, or save. If you are having problems in the third category it is because you are putting too much money into the first two categories, you arenâ€™t earning enough to put into the third category, or a little of both. First, put together an estimated budget. How much are you spending each month on all expenses and how much are you earning? Secondly, do a 30-day spending diary and document every cent that you spend. Thirdly, put together an actual budget to more precisely label what you are spending on a regular basis. To maintain your budget you can use various websites such as www.mint.com. If you do all of that and you still donâ€™t have enough money to put away into retirement, then itâ€™s time to start thinking about how to earn extra money.
Q: What percent of my income should I be investing each year?
Long: I recommend at least 10% of your income. (Wealth for Life Principle No. 4) Make sure you build an emergency fund in a savings account of at least six months of living expenses. Also, check out your employerâ€™s retirement plan to see if they offer a match. If they do, make sure to invest enough in the plan to get the full match. If they donâ€™t, you can get started by opening a Roth IRA and invest up to $5,000 a year.
Q: How can I get startedÂ investing in socially responsible investments and emerging markets?
Long: First you have to determine what socially responsible investing means to you. Many socially responsible funds charge higher fees. If there is something you strongly believe in, you may have more of an effect by investing in low-cost index funds and donating the savings (approximately 1%) to a cause you believe in. An example of a low-cost socially responsible fund is the Vanguard Social Index (www.vanguard.com). It has an expense ratio of only 0.29%. To find out more about other socially responsible funds, check out the Social Investment Forum (www.socialinvest.org).
Davis: It is not a good idea for parents to take out large loans to help their kid go through college. Parents need to say, â€˜Iâ€™m getting old and I need to save for my retirement.â€™ If a parent is going to take out a loan it should be no more than $5,000. Students need to keep in mind, â€˜If you donâ€™t have the money, donâ€™t buy it.â€™ Students need to make sure theyâ€™re looking at the right school compared to the right cost.
Q: How do I find a good financial investment adviser?
Conner: Ask family and friends for references. Pick at least three to five to consider, and meet with each of them. You can check with the securities regulator (www.nasaa.org) in your state for complaints and to ensure they are licensed. Members of the National Association of Personal Financial Advisors (NAPFA) www.napfa.org donâ€™t receive commissions or other incentives for selling or recommending particular investment products.
Davis: Consider consolidating your loans and then applying for income-based repayment (www.ibrinfo.org). If you qualify, you will automatically be given a 10-year scheduled payment plan if you hold a public service job; otherwise youâ€™ll receive an extended 25-year scheduled payment plan. Your loans should be paid off by the end of the repayment period. The good thing about the new loan regulations is if you make good on your payments for 25 years the loans will be absolved.
Q: Is it better to take out more loans to go to a better-ranked university than to take out less money (or no money) to go to a lower-ranked institution or a state school? Which option will provide greater earning potential?
Bissonnette: I donâ€™t think young people should bet their entire financial lives on how much money they think theyâ€™re going to make in four years. Go to a college you can afford and borrow no money if at all possible.
–LaToya Smith and Renita Burns