RSM Resources

Every spring, thousands of college students graduate with hard-earned degrees, high hopes — and a staggering amount of personal debt.

While these young adults have prepared academically for the world ahead, most have little understanding of how to build their fiscal future; even fewer leave school knowing how to manage the influx of cash that often accompanies that first "real" job. As a financially savvy parent, you can help your child make that leap from college kid to confident professional by coaching him or her on the fundamentals of money management and smart investing.

The reality is that most new grads start their adult lives fighting to catch up financially. According to the National Center for Education Statistics, more than 65 percent of college students go into personal debt to finance their degrees, on top of what their parents may borrow, and the typical grad leaves with more than $19,000 in educational loans.

A significant number of students start with even higher loan levels: The College Board reported in its Trends in Higher Education 2006 that 23 percent of borrowers from private nonprofit colleges, and 14 percent of those at public four-year colleges, graduated with $30,000 or more of educational debt.

Credit cards continue to be another financial burden for college students and young professionals. College lender Nellie Mae found that 56 percent of final-year students carry four or more credit cards, with an average balance of nearly $3,000. These early trends in credit card borrowing can set up students for even more troubling economic times later in life. The Center for American Progress reports that consumer debt continues to skyrocket year after year, with household debt recently reaching a record 130.9 percent of income.

The concern about young adults and their spending habits has even triggered a call to action from Vanguard Chairman John J. Brennan, who wrote in his regular Web column about college grads and the key principles for good financial health. Even from the eagle-eyed view of the chair of one of the world’s largest investment management companies, the essential elements of fiscal well-being are universally straightforward: Live below your means, participate in the markets, invest regularly and get knowledgeable.

"My advice contains no hot tips or special insights," Brennan said. "Its sole redeeming virtue is that it has worked."

Brennan emphasized that investing shouldn’t be complicated, especially for those new to financial markets.

"For many people who are just beginning to invest, a life-cycle fund — a mix of stock and bond funds designed for a particular time horizon — is a great place to start," Brennan said. "For others, a traditional balanced fund or a broadly diversified stock or bond fund can also get you going. Regular investing helps you develop the discipline to stick with a long-term investment program through all market environments. It can also reduce the risk — more emotional than financial — of investing a large sum at precisely the wrong time."

That very practical approach to finances is at the core of advice from many personal financial advisors. It’s also central to an online money management tool, Mvelopes Personal, which helps consumers control their spending.

"Ultimately,the foundation of building wealth is spending less than you make," says Steven Smith, chairman, president and CEO of In2M Corp., the developer of Mvelopes Personal. "Personal finance is more complex than ever, and young people in particular don’t always understand the difference between cash and credit. They haven’t learned that when you get a credit card, it’s not cash for you to spend — it’s a potential liability. What we try to teach people is that you can’t spend money you don’t have. If you do spend money that isn’t really there, you ultimately pay for your initial purchase plus much more, and you can easily get into a cycle where your income never quite keeps up with your expenses."

Smith and other experts offer these recommendations to young adults starting their independent financial lives:

Spend less than you make. Consistently spending less than you make is the key to financial stability, allowing you to build short-term savings and long-term investments.

Calculate your net worth. Your net worth should increase each year, even if it is by a small amount. If your net worth decreases, look candidly at where you can adjust the numbers.

Start an emergency fund. This fund should cover at least three months of expenses in case of job loss or an unexpected major expense.

Reduce your debt. List all your debts and prioritize them. Once you pay off your first debt, roll that payment amount into the next debt on your list until you are debt-free.

Have credit cards for the benefits, not the penalties. Use a credit card only when you know you can pay the balance completely when the bill arrives.

Start a retirement fund as soon as possible. Enroll in an employee-sponsored retirement plan or open an individual retirement account to take advantage of tax-deferred growth. If your employer offers matching contributions, be sure to contribute at least enough to earn the whole match — a guaranteed return.

Carry adequate insurance. Having sufficient coverage, including home, life, disability, health, property and auto policies, protects you from catastrophic loss and potentially ruinous expenses.

"Everyone needs to develop a spending plan, regardless of how much you make or where you are inlife," Smith says. "Whether you use paper and pencil, a spreadsheet or software, you need to do something. Financial success doesn’t come from having lots of money — it comes from managing the money that you earn."