Foolish advice

From making money to paying off student-loan debt to climbing the career ladder, Internet entrepreneur Tom Gardner offers these words of wisdom

by Mike Hofman

Okay, you're about $12,000 in debt thanks to your student loans, and the Visa people are starting to get real snide about your credit-card bills. Come May, the real world hits: you'll get a job, cash paychecks regularly, and sign up for health care. In short, your adult life will start to take shape. But here's the rub: those serious questions you've carefully avoided are now poised to dominate your thoughts. How do you make sure that you ace the grown-up "I pay my bills" thing without becoming a drone? For answers, we turned to a personal-finance expert who can identify with your station in life. Tom Gardner, 31, founded a personal-finance Web site with his brother David five years ago. He also co-authored three best-selling business books with his brother: The Motley Fool's You Have More Than You Think, The Motley Fool Investment Guide, and The Motley Fool's Rule Breakers, Rule Makers (all published by Simon and Schuster). The books and Web business have made him wealthy and a mini-celebrity in the business world. And he did all this fresh from grad school, having held just a few odd jobs, including a stint as a bookstore clerk in Burlington, Vermont. Here is Gardner's formula for getting out of student-loan debt, avoiding credit-card debt, and climbing the career ladder.

Q: The premise of this article is that you can offer money advice to people graduating from college. Should I ask a question, or do you want to just start talking?

A: I'll just start talking. Here's rule number one: Do not buy a new car, under any circumstances.

Q: This is something you're passionate about, I take it.

A: A car is a depreciating asset. The more you put into it, the more you lose. My brother bought a new car when he was 20 and he paid the full list price. I've never let him live it down. Buy a used car.

Q: What was your first car?

A: It was an old Subaru that I had when I was at Brown. The radio was stolen in Providence, so I wired a new radio in the glove compartment. I was pretty proud of that little trick. I did break down and buy a new car eventually, in 1993. It was a Jeep Cherokee, and I paid something like $14,000 for it. If you do that, negotiate a lot. And do it by phone if you're uncomfortable haggling with a dealer in person.

Q: This ties into a bigger issue -- personal spending and responsibility.

A: As you're in your wealth-accumulation phase as a young person, you have to be careful about your spending. Every dollar you spend, if you put it into a mutual fund or into the stock market instead, would be worth $5 or $6 or $7 in less than a couple of decades. If you think about it that way, you end up recognizing the value of savings. When you hit 45 -- the wealth-preservation phase -- then you can start doing some serious spending.

Q: More college-age folks are getting into the market, but for many it's still very foreign.

A: The early mistake that I made -- and that 99 out of 100 people make -- is that I had almost no interest in the stock market. I didn't think my personal values could mesh with Wall Street and investing. But now I think it's a great education for a young person. How else can you learn how business works and how the world works?

Q: How did you start picking stocks?

A: I realized that the places I buy from may be great investments. If I spend $400 a year at Abercrombie and Fitch, maybe I should buy their stock. I support the business as a consumer, so it makes sense for me to support them as a potential investor as well.

Q: A lot of people want to get into investing but don't have enough money to buy 10 shares of stock X, let alone pay a broker's fee.

A: You can start investing with only maybe $50 through something called a dividend reinvestment program. It's called a DRP or a "drip" for short. It's a way of buying stock directly from the companies you're investing in. It cuts out the broker.

Q: I haven't heard of that.

A: You haven't heard about it because Wall Street doesn't want you to know about it. All you have to do is buy the first share of stock, and then you can add $5 or $10 per month and buy an eighth of a share or whatever. You can look at the market as a bank, almost. But at a bank you'd get 3 to 5 percent interest, while in a good stock you might get 10 to 12 percent growth.

Q: You can buy any stock this way?

A: Not all companies have programs, but many of the really big ones do. Call a company and ask for investor relations and they'll help you. Say to them, "Do you have a plan that allows me to buy shares from you directly?" Just tell them -- let's say it's Johnson & Johnson -- that you like their Band-Aids, so you'd like to become an investor in the company.

Q: Before you think of putting money in the market, shouldn't you deal with more micro issues like paying off your credit-card debt?

A: People ask us all the time if they have $1000 in credit-card debt and $2000 saved, should they invest the $2000. No! Pay your credit cards down and then worry about investing. If you earn an 8 percent return on your investments but you're paying 17 percent on your debt, you're not doing too well.

Q: How many credit cards should a 21-year-old have?

A: I'd be committed to having just one. Stay away from the store cards. Their interest rates are usually outrageous. Some of them make more money on financing the cards than they do on the transaction of goods.

Q: How do you pick between Citibank and NationsBank and whomever else?

A: There's a Web site called Ramresearch.com that is a great resource of credit-card information.

Q: What kinds of rates should you look for?

A: Interest rates are at an all-time low in our lifetime, and yet they still charge as much as 17 percent. It's a total scam, and the credit-card companies know it's a scam. Unless you're in serious financial trouble, don't pay more than 10 or 11 percent in credit-card interest. Call your provider and say, "I have so many offers coming in through the mail that, unless you drop my rate to under 10 percent, I'll move my balance over to another card." They spend $1000 on marketing for each new customer, so they'll drop it before they'll let you go to another provider.

Q: A lot of people tell you to keep a budget, but that seems awfully stifling. Did you do that in your salad days?

A: My advice is to keep a budget for just one month. No one likes to be tedious and map out what they spend on food and beer and entertainment and books. You have to strike a balance between being thoughtful and being miserly and obsessed. If you keep a budget for just one month, it's kind of an eye-opener. You see where you spend way too much. Across the board, I think there's a way to cut everything by at least 25 percent. You think to yourself, "I spent that much on eating out!" So maybe you bring lunch to work from now on. You can save $500 a year that way easily.

Q: I know that's true, but I can't break the habit of eating out. It's hard to cook for myself every night -- I'm so tired when I get home from work.

A: I'm a big fan of potluck dinners. They're huge. Do that instead of going out. All you have to do to come out ahead is commit to eating more than everybody else.

Q: Career-wise, what advice do you have?

A: Start working at a smaller company. The folks I know who are frustrated work at big corporations. Everyone should have the experience of working at a dynamic company at least once. Why not do it when you're a 22-year-old? Your job will have meaning and you can have an effect on the business. Hopefully, you can get stock options and retire when you're 25!

Q: But most people think that a big company can offer the security that a smaller company can't.

A: Even if you work at a failing company, just being there has an education value for the rest of your life.

Q: What's so great about the experience?

A: A young person's performance is measured more rigorously and you can make more of a difference. The problem might be if you have student loans. I think a lot of people in that boat decide to work for a giant consulting firm for three years and then get out. Just make sure you get out when the time comes.

Visit the Motley Fool at http://www.fool.com for more of Tom Gardner's finance tips. Articles geared toward college students and recent graduates can be found at http://www.foolu.com. Sections include paying for college, how to begin "drip" investing, and the "10 steps to financial independence."

Q: Was your first job at a big or small company?

A: I worked for three weeks at an independent bookstore in Burlington, Vermont. It was totally mismanaged and has since been leveled by Barnes & Noble.

Q: What was good about the experience? What did you learn?

A: We had to greet people at the front door and stay with them while they looked at books. Most people feel uncomfortable in that situation. They'd just prefer to browse on their own. I learned that you have to focus on what the customer is coming to your business for. Whether you work for a local restaurant or a bookstore or a national company, you really, really, really have to be focused on the experience that a customer will have coming into your business. We're moving into a new age when buyers have an incredible amount of information, so they can go anywhere. I think it's good to work at any company where you're exposed to a lot of customers.

Q: How do you find a job that's enjoyable -- that can become addictive?

A: Don't send résumés out to 30 different companies. You don't want a company to put you in a group with 50 other faceless people who have also sent in their résumé. Do some more research and narrow your interests down. Express your interest to one or two companies. Call their human-resources department and say, "Hey, I want to learn more about your company" before saying, "Hey, I want a job." Ask them what kind of culture they have. Any HR person worth his or her salt will take the time to talk to you. People who send us those kinds of messages -- usually in an e-mail -- are always welcomed. I'll stop short of saying it's garbage to draw up a résumé. You should play by the rules on one level, and have a good-looking résumé, but be more entrepreneurial in your approach to a company.

Q: You've started your own company, which more young people are doing. Would you recommend that path to others?

A: That entrepreneurial part of your life helps you see more clearly what you want to do with your life. But there are also tradeoffs. I get 1000 e-mails every day that I don't want to deal with. I would not go out and start a business unless I was doing it with somebody else and had the potential to hire a lot of friends, which Dave and I have done.

Q: Friends are key?

A: Definitely. I wish I had moved a bit more with my college friends. I think it would be really cool -- slightly European -- for you to pick a city like San Francisco or Chicago or New York and move there with four or five friends to get jobs. You can maintain the network that way. Four of the five will get jobs pretty quickly and the fifth will live off the other four. That fifth guy would be my brother Dave. . . . I'm just kidding.

Mike Hofman is a staff writer for Inc. magazine.