A little financial forethought

By Shane Cronin

Massachusetts lost 55,000 jobs between 1999 and 2009, according to a recent article in the Boston Globe. The “dot-com” bust, outsourcing and two economic recessions in the last ten years – among other factors – have all contributed to an inhospitable environment for job growth in the Commonwealth. At least we’re in good company. Massachusetts finds itself in the same dither as a dozen other states including Michigan: home of the precarious American auto industry.

I’d love to be able to tell you with certainty that 2010 is going to reverse the downward trend, but it’s not looking good.

That being said, there are things you can do to subsidize your minimum wage job … if you’re willing to take a few risks.

Last March, in addition to handing out 11 resumes, I decided to take a proactive step toward supplementing my income by capitalizing on what was then the nearly dilapidated stock market. With no financial experience whatsoever and a small insurance check from a minor car accident, I stacked a few chips on the poker table. Nine months later, a couple of my investments paid off, specifically Ford. For those of you who monitor the markets, you know the only U.S. car maker to forgo government bailout funds has proved to be as lucrative an investment as it was a crap shoot.

Aside from investing your money with dicey auto manufacturers, here is what you  and every student should do; open a Roth IRA, which stands for Individual Retirement Account, sponsored by the late Senator William Roth (R – Delaware) in the 1990s. Roth IRAs, unlike standard IRAs, grow tax free, and the money invested in them is withdrawn tax free. The money you dispense into the account comes from your pay check, which has already been raided by both the state and federal governments. There are a few key rules to owning a Roth, however.

You can only contribute earned income to the fund. In other words, you have to have an on-the-books job to participate. So if you work just a few hours a week loading the dishwasher in Franklin, have a work study, or lifeguard at a summer camp, you’re in luck! In addition, the maximum annual contribution you can make is $5,000 until you reach your golden oldies. If your finances so much as remotely resemble mine, this shouldn’t be an issue for you.

“I realize it’s tough to scrape up any money to save for retirement when you’re young and still in school… But if you can, you should. I wish I had done this with some money from my summer jobs,” said Chris Farrell, an investment advisor with Northstar Investment Advisors.

The interest that accrues in ordinary savings accounts generally amounts to pennies in the well. But a Roth IRA can generate tangible income. Farrell breaks it down like this: “Assume you fund $5,000 into a Roth IRA while in college for each of the four years. The total contribution is $20,000. Assume that money grows at 7.5 percent a year until age 65. The $20,000 would grow to more than $530,000, and it would all be tax-free. And if the money grew at 8.5 percent, it would be worth over $820,000.”

Unlike a typical savings account, a Roth isn’t linked to a debit card for all of you shopaholics. The money is not entirely off limits. Medical emergencies and first time home purchases are acceptable uses for the fund. So long as you don’t withdraw any profits from the account, there are no penalties. For example; let’s say you deposit $4,000 into the Roth. After a few years it is worth $6,000. Other than the reasons I previously cited, you can withdraw no more than $4,000 – your contribution – or risk a penalty.

Conveniently, you can bridge your checking account and Roth IRA, and have a certain amount transferred into the Roth on a monthly basis. It can be as little $25 or as much as a few hundred bucks.

Remember I asked you if you were willing to take a few risks? Here’s the catch. Roth IRAs typically mirror the stock market. Therefore, when stocks are down, so is your Roth. But when stocks are up, you’re making profit!

I’m an English major who is looking to be a high school teacher. There will be no multi-million dollar contract for me. With every passing day, my dream of being a celebrity surrounded by adoring fans appears slimmer and slimmer. But that doesn’t mean I can’t be rich. The same applies to you. This is my advice. Set up an appointment with a broker. Talking is free, and there are a ton of firms out there. I invest with Edward Jones. I have friends that use Fidelity. Do a little research to find the best company to manage your money. Start saving now, and you’ll be laughing tomorrow.

Shane Cronin is a Collegian columnist. He can be reached at [email protected].