Allworth Advice: 3 money tips for recent college grads

Question: Kathy in Springdale: My granddaughter graduated from college. Can you share a few money tips that she might find useful now that she’s no longer in school?

A: Oh, to be a bright-eyed, 20-something again with a future that’s yet to be written. Her whole life is still ahead of her, and from a saving standpoint, she needs to use this to her advantage. Share with her the “Rule of 72” to illustrate the power of compounding and the importance of setting aside money as soon as she can.

Here’s the gist: By dividing an investment’s rate of return into 72, you’ll get a rough estimate for how long it will take for that money to double. For instance, if you assume a 7.2 % rate of return, it will take an investment 10 years to double (72/7.2 = 10). So, let’s put real, basic numbers to this: if she saves $5,000 her first year out of school and can earn 7.2% a year, that $5,000 will have the chance to double five times over the next 50 years – eventually growing to $160,000. If she waits too long to start investing, she’ll lose that advantage of time. And the numbers obviously get bigger the more she saves.

We also recommend the 50/30/20 budgeting rule: She should spend about 50% of her take-home pay on “needs,” like bills and expenses. About 30 percent should go to “wants,” such as travel, nights out with friends, and things like Netflix. And the last 20% should be allotted for savings – either retirement or some other goal, like an emergency fund (she should aim to eventually have enough cash set aside to cover at least three months of critical living expenses).  If she is lucky enough to have already landed a job, she should invest at least enough into her 401(k) to get as much match as her company offers.

And we can’t forget about credit cards. They’re not evil – as long as she uses them correctly by paying them off in-full and on time every month and by not using too much of her available credit (aim for less than 30%, or, even more ideally, less than 10%).

Here’s The Allworth Advice: If your granddaughter can establish smart and diligent money habits while she’s young, she’ll be on her way toward a life of financial responsibility and stability.

Q: T.E. in Loveland: I’m 64, retired, and currently receiving Social Security benefits. But I just found out I have a small pension coming my way. Is this going to affect my benefit amount?

A: We’re assuming you’re concerned about Social Security’s Windfall Elimination Provision (WEP), which, depending on the kind of pension you’re receiving, can in fact reduce your Social Security benefit.

Here’s what to know: If the pension is from an employer that withheld Social Security from your paycheck (like most private employers do), then this pension will not reduce your Social Security payment. However, if there was no Social Security withholding (like is the case many times in the public sphere, especially here in Ohio), then there’s a good chance your benefit will be reduced (though there are a few exceptions). We can’t tell you the impact of this reduction since a lot goes into the calculation, but we can tell you that your Social Security benefit cannot be reduced to zero.

The Allworth Advice is to first understand the kind of pension you’re getting. If it’s from an employer that never took Social Security out of your paycheck, the WEP will likely apply to you. If you have questions, we recommend visiting the Social Security website or seeking out the guidance of a fiduciary financial advisor.

Every week, Allworth Financial’s Amy Wagner and Steve Sprovach answer your questions. If you, a friend or someone in your family has a money issue or problem, feel free to send those questions to yourmoney@enquirer.com.

Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses is suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional adviser of his/her choosing, including a tax adviser and/or attorney. Retirement planning services offered through Allworth Financial, an SEC Registered Investment Advisor. Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Visit allworthfinancial.com/?c3=allworth-advice or call 513-469-7500.

This article originally appeared on Cincinnati Enquirer: Allworth Advice: 3 money tips for recent college grads