Dear Dave: I’m currently a senior in college. I’m completely debt-free right now, and I am wondering what I should do to stay this way after graduation.
Dear Cary: You’re already primed for a great start. Doesn’t it feel great to know you won’t have a bunch of payments hanging over your head when you walk out into the world? I’m really proud of you!
There are three major traps I tell all new graduates to avoid. One, don’t buy or lease a new car. Save up and pay cash for your cars for the rest of your life. If you saved the amount of an average car payment — about $485 a month — and put it into a good mutual fund from age 25 to 65, you could easily retire a millionaire. Now that’s something to look forward to!
The second trap to avoid is rushing in to buy a house. The first few years after college will be some of the most volatile in your life in terms of career and relationships. Save up a big pile of cash and be patient. Too many young people today go crazy and buy houses they can’t afford just because their friends bought one, or everyone is telling them it’s what they should do.
Last, don’t ever get caught up in the credit card trap. Your income is your greatest wealth-building tool, so why would you want to take a chance on wrecking your future by sending everything you make to some bank? Live on less than you make, and live by a written, monthly budget.
I think you’ve got a really bright future ahead, Cary. Just remember to have a plan, pile up some cash and stay away from debt!
Dear Dave: Can you explain interest-only mortgages? Are they a good idea?
Dear Dale: An interest-only mortgage is just what it sounds like. You’re paying only the interest on the loan, and none of what you actually owe. It’s a good way to stay in debt for the rest of your life, so they’re not a good idea.
Lots of people look at this product and say, “Wow, I’ll get a lower monthly payment, and then I can throw tons of cash at the principal.” Guess what, in most cases it doesn’t work out that way. Why not take out a good 15-year fixed rate mortgage and put a bunch of money toward the principal? Everyone thinks they have a great idea for tricking the system. But the only system that really works is to pay off debt as quickly as you can.
Interest-only mortgages are like adjustable rate mortgages and high fixed rate mortgages — they’re good things to stay away from completely!
Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.