The Personal Finance Course You Wish You Had in College: Part II: The Finances

Ironically, the picture I chose to use for this post was from a trip to Washington DC with friends right before we all started college and now after college this is where my checks get sent to. This will be a rudimentary outline of what I would have wanted to learn in college in a Personal Finance course. Good news is that of the 120 credit hours you have taken or will be taking, this will probably be one of the most applicable to your daily life. Whether you are in college or a recent college graduate this is for you and the thesis for this course is that a $50,000 salary career right out of school does not mean $50,000. I am going to discuss the importance of getting educated on personal finance for young adults. I first plan to lay out a basic finance scenario, followed by what I think are the most important aspects of personal finances for young adults and those are student loans and credit cards.

The Scenario:

Put yourself in the position of a college grad who is starting their first day at their new career and they are getting paid $50,000, I will call her Suzy Q. Most likely Suzy Q gets paid bi-monthly and that would be $2,083.33 paid on the 15th and 30th of every month. Seems like a good paycheck on the surface. Now I will break it down:

  • Suzy graduated with $40,000 in debt and the average interest rate is around 4% for all of her Stafford Loans. She was lucky and had family help pay the additional costs of college. Because she wanted to pay off the loans quickly, she did a 10-year payment plan. For ease of math, let’s just say Suzy is required to pay $500 a month for 10 years. If you are curious what she would actually pay or if you want to estimate your student loans if you are currently in school, check out this easy to use calculator from the New York Times.
  • Suzy has a checking account and a savings account. Suzy is starting fresh and has just $100 in her checking account and $1000 in her savings from her grandparents.
  • Suzy set up a 401k that takes out 5%
  • Suzy has a few insurance elections that account for $50 a paycheck
  • Suzy has a car with no debt on it because it was her father’s old car but she pays the $100 a month for auto insurance
  • Suzy is lucky enough right now to live at home free of charge but she pays $30 for parking at the train and $180 a month for a train ticket
  • For ease, lets now finally say Suzy has a tax rate of 25%

Based on the above scenario, Suzy’s checking account went from having $100 in it at the beginning of the month to now having $2,158. Sounds like a lot of money for a job right out of college, but before taxes or any expenses she earned $4,166 for the month. So pretty much 50% of her money is gone before she gets to spend/save any of it. A lot of people do not understand this until they get this job and they learn all of this as they go. Something that they will also learn is that the beauty of student loans is that when you first start paying back the loans, after your first year or so of payments you’ll realize your outstanding balance remained the same, if not increased a little bit. That is because depending on the way you elect to pay back your student loans, your monthly payment might just be used to pay off the interest accrued for the month.  This is all why I think it is very important to teach college students this type of lesson and make it applicable to real life and make it personal for each student. This way they can truly start to understand the value of a dollar before they really even have to experience any of this. Learning this ahead of time can help a student understand prioritizing finances and saving money and even investing.

Student Loans:

Now that I outlined a basic scenario of how many college graduates are with finances after college, I want to stress the importance of personal finance education to college students. College students should 100% be taught the very basics of taking out student loans, the basics of personal taxes, the basics of insurance, etc. The way society is now with “millennials” is that you have all of these high school students thinking “the next step is to go to college, graduate, and get a job”. Seems simple, but the way the system of college is setup in the US is it allows for the vast majority of high school students to attend college and take out thousands of dollars in government/personal loans with ZERO issues. Credit score doesn’t matter, income doesn’t matter, the government is going to write the check on your behalf because they know for 100% certainty that you MUST pay back your loans and not even a bankruptcy can save you.

If you compare taking out student loans to taking out a car or home loan, you will find the process much more grueling and more based on your likelihood to pay back the loans based on many financial factors. Without getting into details and stating facts that college is outrageously expenses and the costs are out of control, I think that is a fact that pretty much every single person in the US can agree on. However, just because the cost of college is out of control and that means more debt to students, the government still does not care because they know you will have to pay the loans back and they also get more interest on higher amounts of money loaned to students.

This is why personal finance education is so important. I think that if students were educated on student loans and personal finances, many would think twice about where they went to school and how much school costs. Right now students choose a school based on a program, or a sport, or location without really any thoughts on how much it will cost them. Of course the school you go to breaks down the amount of the estimated costs like tuition, cost per credit hour, textbooks, housing etc. but at the end of the day the student sees those amounts and just thinks “I will worry about the loans later”. Look at it this way: A student wants to buy a car for $20,000. Right when you are applying for the loan you get estimated on an interest rate and an estimated down payment and an estimated monthly payment on the loan. The student looks at this more objectively and makes an educated decision based on the numbers specifically because at the time paying off the car takes effect immediately and they have to look at their income and savings to see if they will be able to maintain payments at this time to afford this car. Depending on your job and other factors, some people will be able to afford a down payment of a couple thousand and a monthly payment for 5+ years of $300 a month, but others will see that, look at their finances and know there is actually no way they can afford the car right now so they do not buy it, even though they want the car very badly those people who cannot afford that car will have to look elsewhere for means of transportation.

Buying a car, depending of the situation, can be a necessity and as some people see it, college is a necessity to this day in age, however there is a huge difference on how students look at both necessities. The car, they look at much more closely and if they can afford it, they buy it and if they cannot afford it then they look for a much cheaper option because at the end of the day, they do need the car. If you look now at how a student analyzes the cost of college, they do not care when they enroll in a college of the interest rates, timeframe to pay the loans back, and the monthly payments because at the time of enrollment they do not care of the costs because it’s not something that will go into effect as soon as they enroll day one. College students and even graduating high school students should be educated on the costs of college and how it can affect them when they graduate. I am not saying all students after being educated will make better decisions where they want to go to college because they were educated on the costs of college. I am saying that students must be given the opportunity to be educated on personal finance that most certainly must include the cost of college. That way, at least, for the students who do care about money, they are then more aware of their finances and the cost of college and might make a different decision on where they go to school.

Credit Cards:

Finally, after my tangent on student loans, I can finally discuss the importance of credit cards and how they can help a college student with their personal finances. Many people are afraid of credit cards, probably because they are unfamiliar with how they work or because they hear horror stories. For me credit cards were and are a very positive experience. Credit cards give people the opportunity to spend money they do not have, but if not done correctly can lead to a mound of debt. Using credit cards also gives people the opportunity to build their credit history so when they are older and are looking to buy a house, they have the solid credit history needed to get approved for a mortgage. Credit cards helped me get some nonsense things like a new Xbox or a new TV during college. But where they really came in handy was for booking trips and going out to restaurants/bars.

I applied for my first credit card around my sophomore year of college when I just turned 19. The card was a Capital One Journey card with a $350 and a very high APR of I think 24%. For those who do not know how credit cards work, in the worst case scenario I will pay $84 in interest for an entire year. Now that may sound like a high number while in college making minimum wage but I assure you it is not. Also, $350 of debt may sound like a lot at first, but I will assure you here that it is not. As a college student why isn’t 24% interest on $350 and being $350 in debt a bad thing? The answer is simple, if you have a job now during school that you take seriously and are working hard while at this job, you go into the whole idea of credit cards with an optimistic view. I assumed, ok worst case scenario, I max the card out and I pay $84 in interest a year ($7/month) plus the minimum payment. Assuming that, I then was a big optimist in thinking that I will rack up debt now but when I graduate I will be able to pay off this credit card debt no problem and guess what it worked. I estimate that I probably graduated college with about $2,000 in credit card debt between the 2-3 cards that I had with variable interest rates. And no, I did not max out a single card. I was very responsible when it came to making payments on time and not maxing out any card. Instead I utilized the credit cards and got $2,000 in debt but guess what types of things I spent that money on? I racked up that debt on my New Year’s Eve trip with friends to Fort Lauderdale in 2011, I took weekend trips to nearby cities like Milwaukee, and I went out a lot to bars as soon as I turned 21 my junior year. Looking back, I do not regret any of that. I consider those to be experiences that you cannot get back while you are young. As of right now, I paid off all of that debt from college now that I have a very stable full time job. Ok, I did just make the minimum payments every month to maximize my cash balance so yes I paid a little bit of interest on the credit cards.

There are some tricks I used to not let the idea of credit cards scare me. For starters, I completely ignored the horror stories I heard of people filing bankruptcy because of credit card debt. I then ignored the APR% I would be paying on each credit card. The credit limits on my cards in college were all under $1,000 so even a high interest rate was not a lot of money. If I had a card with a limit of $800 with a 25% APR and I had a $500 balance on the card, that means every month I would be charged $10.42 in interest. The key here is to always make payments on time, and when you can even do a little more than the minimum payment because then that would lower the amount of interest you have to pay. In college, I lived off just paying the minimum payments and rolling with the punches while knowing that eventually I will pay off the debt no problem.

As you can see if students were actually educated on personal finance when they were younger, many would make smarter decisions with their money. I acknowledged that there are true horror stories of people and credit cards, but they should not be feared. When you are younger, no one seems to talk about the benefits of getting a credit card, which are what I just outlined. Something I did not touch on with regards to benefits of credit cards are rewards. I will not get into the details here but pretty much when you do not have a credit card and just use a debit card for every purchase you make, what do you get out of it? Nothing. At least with a credit card, you get rewards ranging from cash back to points to use for travel. Although I extremely encourage credit cards in college, I will state a disclaimer that it is easy to get carried away with credit cards and get into bone crushing debt, but that is the whole point of educating young adults on credit cards.

To wrap up, I wrote on many reasons why the education of personal finance for young adults or college students is important and I hope you can agree that it is very important that young adults get educated on personal finance before someone starts college or at least when someone is in college rather than the current method of “learning as you go”.