Money is best defined as the principal measure of wealth. A clear understanding of this wealth, along with some decent financial planning will help college grad reach their goals quicker and more efficiently.
Unfortunately, college students are as green as they come in regard to financial know-how. For instance, one Stanford student had mistaken a paid vacation for one where her employer would cover expenses related to travel and leisure. Another had no idea what a water bill was, and a third had threatened to denounce the work-study office to the police since it was allowing the government to deduct money (taxes) from her wages.
This is why Mary Morrison, familiar to Stanford students as “ the reality check lady”, initiated coaching a distinctive finance class for seniors 16 years ago. She declares, “Some students enter knowing nothing. They are actually like a rabbit caught in the headlights.” Morrison administers a dose of harsh love and honesty to the 200 or so students she manages to get her hands on every year. They described the encounter as “funny and horrifying at the same time” she says.
Her students say Morrisons’ lessons would make a great book, but she claims that she is too busy with her work as the director of funds management in Stanford’s financial aid office. But lucky for us, she’s shared her 10 most important financial lessons in an interview with FORBES. Let’s take a look at them below!
A Bigger Dollar Amount Isn’t Always Better
A lot of us, especially when we’re just getting started, tend to be swayed by the bigger dollar amount. However, there are a lot of factors that should go into determining whether that job with slightly better pay is actually the right one for you.
“If you’re offered X dollars in Kansas City, it’s not the same as if you’re offered X dollars in New York City”, explains Morrison. So, evaluate benefits and location. Compare the enticing aspects of workplace culture with the actual worth of a health plan, and consider what you want from your career and what the rewards are of those decisions. “You may think it’s wonderful to be able to throw a Frisbee down the hall, but what does that even mean in comparison to dental insurance?” she asks.
Make a Realistic Starting Out Budget
The one that ends up shocking college grads who are looking to start out in the “real world” is how much it takes to do that. They may have considered rent, but they may have not thought about factoring in the deposit that comes before. Even certain utility companies require deposits!
Plus, you’ll have to wait until the end of your first working month to get your hands on that paycheck, so you should consider that as well. “You have to figure out what you’ll need to live on before that first paycheck,” Morrison says. “Few people’s parents can write them a check for $3,000.”
Understand Your Take-Home Salary
This again goes to being blinded by a nice dollar amount on your offer letter. You should understand that the number you see isn’t what you will get every month. This begins with accurately completing your W-4 tax payment form and having the appropriate deductions made from your paycheck.
Without understanding what you have to deal with, you cannot even start to create a budget. “A paycheck and the dollars that come into your hand are not the same things,” Morrison says. “You and the married guy next door with three kids will not get the same check for the same salary.”
Be Sensible About Your Expenses and Requirements
College grads have always been living under someone else, or even if they’ve had experience working to cover expenses, chances are that those expenses have been severely discounted. As they come out of that cocoon, it can be difficult to grapple with the expenses that come with those big boy pants.
“Some students have lived in an apartment before, but after college, it’s not a big party and eating your roommates’ food late at night,” says Morrison. It’s time to deal with costs like travel, medical care, food, entertainment, and incidentals. Organize everything. Morrison says that it’s not unlikely that a college student expects to survive on $50 a week for food. “I tell them outright in the class that they won’t/can’t do that and they generally ignore me when they sit down to make their plans,” she says. “I don’t care if they get a pet snake. Just know how much it costs.”
Understand Cash Flow
A cash flow statement shows the source of cash and helps you monitor incoming and outgoing money. You must keep in mind and check the specific date and time that your invoices are due in addition to the exact amount of your pay.
Set Up an Emergency Fund
An emergency fund is spare cash that is set aside for a potential time when you may be in financial distress, such as a job loss or other financial emergency. “You’ll be sick. You’ll be hurt. Life will happen to you the same way it does to everyone else,” Morrison says. Therefore, prepare yourself for such a scenario mentally and physically.
Know The Right Time to Use a Debit Card or Credit Card
According to Morrison, students need to have credit cards. Paying off a credit card each month will enable a youngster to establish a credit history and, ideally, a high credit score. They are also more secure against theft than debit cards.
She suggests that students use a debit card instead while making regular transactions like eating out, filling up the car, or going to the movies. This will help them be shielded from the common “’I spent how much this month?’ experience”, she says. Morrison suggests reserving the use of credit cards for planned expenses of a larger nature – and avoiding using them for impulse purchases.
You Need Insurance – All of Them!
Insurance is your safeguard against financial ruin in case something goes wrong – so get friendly with it. Familiarize yourself with insurance options provided by your employer and make sure you have worker’s compensation insurance. Never use a vehicle with only minimum liability auto insurance and make sure you have renters’ insurance. With a security deposit or written agreement, you can financially safeguard yourself from a “roommate who might run off to Puerto Rico,” as Morrison puts it.
Set Up a Retirement Account ASAP
You’re just entering the job market and the last thing you’re thinking about is retirement, but it’s important to set up a 401(k) or IRA account as soon as you possibly can. “Even if you start off slow and modest, it will make a huge difference,” Morrison says. The $50 or so you set aside from each paycheck may be missed, she asserts, but it will grow over time and help you build a nice nest egg for your later days.
Investments are a major contributor to building wealth over time. Look at all the billionaires around the world. Have they built up their net worth by relying on their monthly paychecks or by building up a smart and diverse portfolio of investments? You’ve got your answer right there!
It may seem daunting at first, but you can start out slowly and branch out as you gain confidence. One thing Morrison says you should avoid in investing is to just open up a savings account and sit back “because you’re essentially betting against inflation”.