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An I-bankers guide to college finances

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Your parents might still be willing to pay your bills and do your paperwork, but the sooner you take it on yourself, the better. Longtime tipster and Lehmaneer Tao Tan kindly wrote up these simple guidelines to avoid financial ruin. Scroll down, there’s a lot.


sdfPart I: Set Up Your Banking.

When you come to Columbia, you’ll probably get inundated with Citi’s offers and advertisements. Citi is a great bank for a lot of reasons. They’re large. They have a branch on campus. They’re free (supposedly), and so on and so forth.

But get this. If you take money out of a non-Citi ATM, you’ll get charged anywhere from $0.99 to $2 for the privilege of withdrawing your money. It’s really not a big deal, because we have a branch on campus and there really is no shortage of Citi ATMs in New York, but then again, it can get annoying and it can add up.

So, instead, check out First Republic Bank. They give you free checking and unlimited ATM refunds anywhere. You can walk into Pinnacle or Morton-Williams and use their ATM and you’ll get your $2 or your $1.75 or whatever refunded to you at the end of the month. (I have heard, but have not seen, ATMs in certain… uhh… less-than-respectable establishments charge $10-$15 transaction fees – anyway, don’t push your luck.) If you travel overseas, you get both the ATM fee and the foreign exchange fee waived. It doesn’t matter. You get unlimited refunds. There’s a $2,500 minimum balance, but you set up a direct deposit, it’s waived.

They only have five branches in Manhattan; the closest one is in Columbus Circle. BUT, 1) you get a personal banker. If you need to make a deposit, your personal banker gives you pre-stamped envelopes that you can just mail in, and 2) if you visit in the morning, you get cookies and coffee, and 3) if you visit on a rainy day they give you an umbrella. No kidding.

Now, onto savings accounts. The definition of a savings account these days is getting more and more blurred. In some cases, you can even avoid taxes by having a savings account denominated in municipal bonds and money market funds (for example, through Fidelity Investments). A good rule of thumb is to have three months of living expenses stashed away in cash in a savings account. It’s good to have a cash cushion in college for the holidays, spring break, or slow periods during the summer.

A good way to approach savings is to just consider a monthly deposit to your savings account as your first monthly bill. Essentially, you “pay yourself” before anyone else by depositing a percentage of your pay into your savings account. Another thing to consider: get a savings account at another bank than your checking account. Why? Think about it. Let’s say you get an urge to splurge. Suddenly, that chunk of money sitting in your savings account looks awfully tempting – especially if you can arrange an instant transfer into your checking account. But if it takes two or three days to transfer that money from a different bank, you just might think twice.



Part II: Credit and Credit Cards

fgdIn our modern society, you cannot get by without credit. Period. You cannot buy a car without credit. You cannot get a mortgage without credit. You cannot even rent an apartment if you don’t have good credit. But on the other hand, if you go overboard, you can damage your creditworthiness for years, if not permanently. Employers have been known to rescind job offers based on a negative credit report.

The average college student graduates with around $2,300 in credit card debt. By making minimum payments on a 19% annual interest rate, it could take up to 20 years to pay off, and you could end up paying more than double the original $2,300. Think about it. You’re a cash cow. A 19% year-on-year return is something hedge fund managers dream about. Be careful and be sensible with your credit card debts. If you can, always pay your bill in full every month. Then you have no financing charges.

At the same time, you need a good credit history. Credit histories are measured by credit scores, a number calculated by three credit agencies. They are usually out of 800-850. Anything above a 650 is good, and anything about 700 is very good. The formulas used to calculate the scores are a closely-held secret, but there are a few things which noticeably affect it.

  • The average life of your credit accounts. Do you hold a card with an issuer for years? Or do you open and close them every month? The longer the average life of your accounts, the better. So, lesson 1: keep your accounts open.
  • The percent usage of your total credit line. If you have a credit line of $1,000, and you are using $900, that’s 90% usage, which hurts your score compared to if, say, you only used $250 of your available credit. Put your card away in a binder and forget it exists if necessary. Lesson 2: just because you have credit doesn’t mean you have to use it.
  • Your history of payments. Do you pay your bills every month? Or have you missed payments? Missing payments even by a few days can stay on your history for years on end, and can be a huge negative when applying for credit. Set up Outlook/GMail reminders. Write yourself notes. Lesson 3: pay off your bills every month, at best in full, but do it even if it’s just the minimum payment.
  • Is anyone screwing you over? Identity theft is a fact of life. You are allowed one free credit report from each of the three credit agencies per year (https://www.annualcreditreport.com/cra/index.jsp).  Lesson 4: check up on your credit report every now and then to make sure everything safe. (Note: this is the only official site where you can receive free credit reports, but there’s a bevy of less-than-honest places out there that’ll try to get you to pay for “credit monitoring” services and other crap. You should never have to pay for a copy of your credit report if you request one per year.)

Also, watch out for “charge cards”, where you pay in full each month, and cannot carry a balance. The vast majority of them, such as the American Express Green, do build credit. But there are a few cards, nominally billed as charge cards, that are actually “deferred debit cards” that don’t build credit. Just scan the fine print.

So what kind of card should you get? First of all, if you’re on your parents’ credit card, get your own immediately. Even if the card has your name on it, if the bills go to your parents, you are building their credit, not your own. Don’t cancel. Just put it away and don’t use it. Make it actually for “emergencies”.

For yourself, get one VISA/MasterCard and one American Express – and you should be covered wherever you go in the world. You probably don’t have much of a credit history at this point, so don’t aim for the big leagues just yet – the Amex Centurion can wait. Personally, I like traveling. But I hate those cards that let you earn miles on airlines because you have to pay an annual fee plus it’s getting more and more difficult to redeem miles (I’ve heard stories of people trying to book reward travel 9 months early and still getting turned down).

Take a look at the American Express Blue Sky. It’s pretty simple. There’s no annual fee, and if you spend $7,500, and you get a $100 refund for everything travel-related you bill on the card. That works out to 1.33¢ for every dollar you spend, which compares favorably to regular frequent flyer miles, which are worth anywhere from 0.5¢ to 1¢ each.

On the VISA/MasterCard front, try the Capital One No Hassle Miles Rewards. Same concept as the American Express Blue Sky. Instead of earning miles which are getting harder and harder to use, you get a direct refund for your travel spending. If you aren’t eligible for the No Hassle Miles, get another Capital One card. Capital One is unique among credit card issuers in that they waive all foreign exchange fees if you’re every in another country. Most issuers gouge you by 2-3% for foreign currency transactions.



Part III: Investments and Taxes

dsfYes, it’s true. Now that you are 18, you are legally allowed title to your own investments. To be brief, I’m not going to teach you how to invest. I have no idea how to even do it myself. If you know what you’re doing, go for it, and best of luck. That all being said, here are a few points on what to think about.

First, find a good broker. I like Fidelity Investments because they can easily link with my bank account, have something neat called “Full View” which can log into your other accounts and display all your financial information on one page, and have a pretty good family of funds.

Second, good investment strategy stresses diversification. Yes, you could have made a killing if you plunked 100% of your money into Google a few years ago. But when Google came out, people were bewailing how it was a “failed IPO”. And for every Google, there are hundreds, if not thousands, of Webvans and Kozmos. Never heard of them? That’s kind of the point.

Third, watch out for hidden fees. If you go for mutual funds, which are professionally managed funds tailored for individual schmuckos like you and me, watch out for two things, the expense ratio and the load fee. An expense ratio is what the fund charges for managing your money. If you have a fund that returned 16% this year, and has a 2% expense ratio, that means it really returned 18%; the fund managers just took 2% in fees. In practice, expense ratios are getting lower every year. Try 1.25-1.5% for an upper limit. The load fee is how much it costs to sell the fund. These things sneak up on you because they only kick in when you try to convert your fund into cash. Your best bet? Find a no-load fund. Fidelity Investments and T. Rowe Price do well in this regard.

Don’t forget to watch out for taxes. The 2001 tax cuts (which were largely engineered by Columbia Professor and Dean Glenn Hubbard, by the way) will start to be phased out in 2008 and will expire entirely by 2010. For some reason, I don’t think what will probably be a Democratic Congress by then will be terribly inclined to keep them on the books. But the long and short of it is, if you make money on investments before 2010, you’ll be taxed at 15%; after 2010 (when y’all are seniors), it’ll be 20%.

Lastly, open up an IRA, or an individual retirement account. You can do it through Fidelity (or really, any broker) for free. There’s types of IRAs: a traditional IRA and Roth IRA. At this point, it is almost always to your advantage to open a Roth IRA. It’s better than a traditional IRA in that it’s taxed in a different way (advantageously for you), and there’s a lot of flexibility. If you need to withdraw money before you hit 59 and a half, you can do that without too much grief. You can contribute up to $5,000 a year. Do it. The US government is rarely this generous in giving you your money back instead of spending it on stuff like Medicaid and Iraq.

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16 Comments

  1. columbia ibanker

    Good advice, but keep in mind high-yield e-savings accounts (APY of ~5%++) are a good way to save too...

    • ttan

      It all depends on your tax bracket. HY savings accounts do well, but they are taxed at ordinary income rates. You can avoid all Federal taxes on munibonds. Plus, the 5%+ yields aren't going to last past this September...

  2. mlp

    A note to anyone who doesn't have a Citi account: the Citi ATM on campus does not charge any fees, no matter what bank you use, so if your bank doesn't have an ATM near campus don't be afraid to use the one in Lerner. Do make sure that your own bank won't charge you a fee for using an outside ATM, though.

  3. this post  

    is kind of helpful but extremely boring.

  4. thanks bwog  

    actually kind of helpful.

  5. ...  

    You know how else this is like ibanking? A sixth grader could figure it out.

  6. Anonymous

    Although Citi may not charge you... yes, your bank might.

    I think the way BOA worked was, BOA waives the first two non-BOA withdrawals, and then after that there is a $2 fee.

  7. Building Credit  

    I was under the impression that in order to build credit, you do actually have to use the card (ie you can't just put it away), and make credit card & other bill payments regularly. Somebody pls clarify

    • ttan

      You build credit by using a card. However, if a card goes unused, it doesn't count as "negative credit". If the alternative is that you go apeshit, put it away. However, by all means, if you can use your credit card to buy 1 coffee a month (or set it to auto-donate $1 a month to a charity) -- go for it!

  8. ooo

    oh kozmo... how i miss you so...

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