Wednesday, May 04, 2011

What's In Your Pocket? A Graduation Guide For Living In The Age Of Debt

A few weeks ago, one of my friends was sorting a box of stuff that had gotten thrown into the garage prior to a kitchen renovation years ago.  She found an historical artifact that she swears she is going to send me for a future lecture on the recent economic meltdown.  It is a flier from one of those advertising mailers that usually has coupons for a few things you really want (like laundry soap), as well as ads for a few local gardening centers and siding contractors.  This particular ad was for Countrywide Financial, one of the lenders whose dishonest practices figured prominently in the home loan bubble.  Countrywide offered to refinance her home if she just filled out the coupon and sent it back, no credit check required.  "Imagine!" she said to me, as if she had found a poodle skirt in the closet. "Refinancing your home through an advertising mailer!"

But that was exactly how it happened in those days.  And despite everything, that's how it is still happening, except that the banks are shifting their lying ways away from a market they have already destroyed and towards consumers who have not yet had an opportunity to go into bankruptcy.  This market is working class and middle class college students from prestigious institutions who will actually become paid workers (as opposed to the people who take massive loans out for on-line degrees and for profits, who default at the highest rate and often don't get a degree either.) A graduating senior who went to a mandatory financial aid exit interview informed me that, as part of this counseling session, a representative from a major corporate bank was available to explain to them how important it would be to sign up for a couple credit cards to establish a good credit rating.  This would assume, of course, that these students had not already signed up for credit cards from the people who shill these instruments in the student center. 

Part of what amazes me (other than the fact that colleges allow these snake oil salespeople on campus) is how persuasive the banking industry can be in convincing us that what is good for them is good for us too.  Got debt?  Here's a great idea:  you need more! Because actually, paying back a college loan that is the equivalent of one or two down payments on a house, or four or five decent used cars, does not give you a credit rating at all.  This was what I discovered when, prior to buying a house and after having paid back a small but significant graduate student loan, I tried to get a car loan.  Oh sure:  they were willing to lend me the money, but not at a good rate of interest.  Why?  Because I had no credit history, even after having made payments of over $20,000 in principal, interest and fees.

It is this crazy glitch in the system that allows the credit card lady to encourage people who are already massively indebted to take out more loans and not be locked up for the liar that she is.  The only thing more un-American than having a bad credit history is having no credit history: hence, much of the information young people are being given as they exit college in debt is, in fact, aimed at helping them to take on more debt.  We have to remember that this counsel is coming from a business class that contributes gobs of money every year to politicians who howl about a national debt that they claim is out of control, not because of war, runaway medical costs and tax breaks for the wealthy, but because of education and services to the poor, elderly and disabled. This national context makes it particularly bizarre that there is advice all over the Internet (probably written by former English majors now working for Bank of America at $10 an hour) about how to raise your credit score by maintaining a "healthy" amount of debt all the time and paying it off over the full term ("small amounts every month" is the phrase that recurs constantly) so that the banks can haz maximum interest the borrower can demonstrate good consumer citizenship.

So here's the Radical financial aid exit interview for those of you coming out of college or graduate school who are looking down that financial shot-gun barrel:
  • Paying off your college loans early saves you lots of money in interest.  This may seem inconceivable to you, but making one extra payment a year will save you thousands of dollars in the end.  Figure out how much extra that is every month (if your loan payment is $500, that's less than $50, or one Saturday night bar hopping in lower Manhattan) and add it in.
  • Everyone needs one credit card to buy plane tickets, and to cover some kind of emergency. By emergency, I mean realizing that a new transmission is in the cards, and you need that vehicle to get to work.  A new couch on sale at Crate and Barrel is not an emergency.
  • If you are consistently carrying credit card debt you cannot afford to live the way you do.  It is one thing to use a credit card to buy a couple thousand dollars worth of clothes that you will need to start your job; another entirely to be buying your groceries and gas with a credit card while your paycheck dribbles away on other things.  Create a realistic budget, compare it to what you actually spend, and adjust accordingly.
  • You don't "need" to buy your home; hence, you do not "need" to build a solid credit rating in your first few years out of school.  You may never need to buy your home.  You may want to buy your home; it may fulfill a lifelong dream of domesticity to own your home; but it is actually not necessary.  In fact, owning your own home is far more expensive than any real estate agent or loan officer will tell you:  yes, the property taxes and the mortgage + the mortgage deduction will come out to less than renting in most places.  But, utilities and energy costs aside, what about the part where a tree falls on your roof, or the old drunk upstairs leaves the bath tub running?  So don't kid yourself that taking on all kinds of new debt following graduation is part of your long-term financial plan.
  • Consider getting a second job to pay off your student loans.  One or two shifts a week as a food server, with tips, would actually allow you to double your payments and -- get this -- pay off that debt in far less than half the time, because you are whacking away at principle at an astonishing rate.  The biggest lie about student loans is not the idea that the education you went into debt for is worth having, but that you should be able to graduate and just have a normal life like rich people do that has no pain in it.  Paying off debts often hurts, and requires sacrificing leisure if you are going to do it expeditiously.  But you might want to do that to become debt-free.
  • Debit cards are worth it if you pay attention.  If you don't pay attention, your bank will charge you all sorts of fees for using a debit card, but if you do pay attention, you don't have to worry about carrying wads of cash around and using your credit card just because you have neglected to go to the bank.  That said, having an unmeasurable access to your money makes it more likely that you will spend it in unplanned ways.  Cash is better.
  • When establishing a bank account after graduation, look closely at smaller banks and credit unions.  Any institution that has to work for your business is going to be more competitive in its services and fees, and credit unions are established for the benefit of the membership, not shareholders.  One thing to remember is that you can change banks if the one you are patronizing doesn't serve you well, although online banking practices makes this infinitely cumbersome.  I have been planning to leave Bank of America for years (the account that I originally opened was at a local bank that was eaten by larger banks in the go-go eighties, and eventually by BOA in 1995) and I have put it off because I would have to re-enter all the payment information for my monthly bills. Dumb, eh? But my point is this:  bank fees change all the time, and banks count on it that you are not paying attention to them.  That extra $35 you are being charged for this or that is a big chunk of that extra student loan payment you want to make every month.
  • Suze Orman is a highly grating personality but she is right about almost everything.  One of her, or someone else's,  money management books should be on your summer reading list.  Her basic message is a good one:  show yourself a little tough love, don't indulge yourself with a life you can't afford, free yourself from high interest debt, and you will liberate yourself to make the choices you want to be able to make in life.  You might not become rich -- but you will be dramatically less coercible.  You won't have to stay in a job you hate just to pay the bills; you can save money and support a life doing underpaid labor (like college teaching, for example); you can change careers; you can drop out of the workforce for a few years and raise your kid/travel/try to write a novel.
And while you are at it?  I know this is anathema, but go talk to your parents about money.  You would be surprised what they know, and if you are really lucky they will share their mistakes as well as the things they think they have done right.


nicoleandmaggie said...

All great advice, except one...

Totally disagree with the Suze Orman recommendation, and actually, so do you. She has an entire chapter contradicting what you said about debt, credit cards, and the credit score in YFB. She strongly encourages living beyond your means via credit card when you're a young professional in one of the chapters. (Yes, she says, "Don't overdo" but I don't think anybody thinks they're overdoing when they start getting into cc debt, and her justification examples encourage a lot of sins.)

Since the financial crisis she no longer recommends that in person, but it's still in that particular book. Suze Orman isn't bad but that particular book is dangerous (and we know people who have used it to justify excessive debt and spending). 9 Steps to Financial Freedom is much more measured.

Better: sites like Get Rich Slowly (and his book: Your Money the Missing Manual). If you have self-control problems and debt, Dave Ramsey is best (Total Money Makeover). If you don't like details and you're making a nice salary, any book by David Bach (Smart X Finish Rich) and/or All Your Worth by Elizabeth Warren.

Finally, if you want to know what all this money is for and why you work... Your Money or Your Life by Dominguez and Robin.

Tenured Radical said...

Thanks. I changed the link. I found the 9 steps book to be enormously helpful at a certain point in my life, and assumed that the one aimed at young people was more or less the same. You are right: it isn't.

Any other contributions readers?

Sapience said...

It's all about self-control. I'll be graduating from grad-school debt free (with no help from Mommy and Daddy, either) because I was willing to live with roommates instead of by myself, I cut out the cable and other extras, and otherwise live fairly frugally.

But I have mixed feelings on the credit card issue. I use a credit card for everything--I never pay cash if I can help it. I earn points/miles on every dollar I spend, and because that includes groceries, rent, and all my utilities, once a year it adds up to a free flight home to visit my parents. But I pay off my credit card every time I get a pay check--it never becomes an issue of having to pay interest. If you can't be disciplined enough to pay it off every single time, then you shouldn't use it, but I don't think it's an absolute rule to not use credit cards except in emergencies.

Tenured Radical said...

Sapience: you obviously have a shrewd sense of how to manage things. I think the siren call to spend is too strong for many people, but you demonstrate how a credit card might be part of actually maintaining a budget. Nice.

Matt_L said...

A great post radical and sound advice for almost every stage of life, not just for students graduating into a sour economy.

Money is power. Don't let money have power over you by ignoring your money.

Sisyphus said...

Chime on the credit union. Mine has a debit card with no problems or fees.

Now if I could only pay down the last of my moving expenses!

Kimberly said...

I just want to second the recommendation for Get Rich Slowly. It's accessible and it really focuses on spending in accordance with your goals rather than mindlessly. I have found that focus particularly helpful (although I haven't read any of the books mentioned). It's easy to think of budgeting and being responsible about money as punishment. This approach is very appealing psychologically.

leslie said...

It is one thing to use a credit card to buy a couple thousand dollars worth of clothes that you will need to start your job;

are most young people getting high enough credit card limits to charge thousands of dollars? my post-crash credit limit is $1,000. it's hard to get into much trouble with that, but it's also not that useful for an emergency.

Token Straight Breeder said...

I think the hardest thing is figuring out the difference between "need" and "want".

Straight out of college, a small income might cover all your needs and a few nice extras, but not if your habits have already become too rich for you.

For instance: Once you understand that any food not cooked at home is a luxury, you can enjoy treating yourself to occasional meals out, while brown-bagging most lunches. But if your habit is to go out to lunch every day, and get your daily Starbucks fix, you don't even see your income leaking out before you even make it to dinner, let alone car repairs.

I kept a monthly graph of my savings account balance my first year of graduate school, as I saved for a car. (Luckily, in a city where it was safe to use a bike as my commute vehicle.) Watching that line climb helped keep me honest about my non-essential spending.

My parents had made it clear to me that the only thing one should pay interest on was a house, so I was pre-trained to pay off my credit card each month, and to save for the car instead of financing it. But then, I had the luxury of graduating from college flat broke, instead of already carrying debt.

When, many years later, partner and I bought our house and I was gushing about how nice it was not to have to go out to the laundromat, my parents congratulated me on returning to the standard of living they had raised me at.

ladysquires said...

All of this is very solid advice, though I agree with Sapience that a no fee credit card can be a boon if used wisely. We pay our cards off every month and use the gift card partnership program to get extra money back. This is how I afford a Banana Republic wardrobe in grad school.

But your final point it, I think, the most important. True luxury isn't inestimable wealth but the freedom to live the kind of life you want. Thanks to scholarships, wise/lucky investing, and discipline, my partner (who is a high school teacher) and I entered my grad school career debt-free, and we've managed to live a very comfortable middle class existence (we have 40% equity in our home) even as some of our friends and relations with high paying jobs in finance and computer programming are struggling under mounds of credit card debt.

One piece of advice I would add: leaving the dorm doesn't mean you no longer need a roommate. Having a roomie to share rent and household expenses will save you a lot of money and allow you to maintain a better standard of living.

Flora said...

I'm a graduate student still figuring out how to manage my money, but the one thing I do that I am a million percent sure saves me is maintaining separate bank accounts: one for bills and one for everything else. As soon as my paycheck is deposited into my general account, I transfer the amount I need to cover bills for the next month, plus a little extra ($100 at least, if not the rent for the month after that as well). Those extras are wonderful for the summer months and all of the fun surprises my car has in store for me. If I did somehow manage to come out of a month with surplus, I deposit that into the bills account as well.

Next step: getting the self control Sapience has...

GayProf said...

or the old drunk upstairs leaves the bath tub running

Did I do that again?

Brian W. Ogilvie said...

Great advice. For new college grads--or, for that matter, freshly minted Ph.D.s--I recommend Beth Kobliner's Get a Financial Life, which is sensible and succinct, or at least the first edition was.

I ended up running a balance of a few thousand dollars on my credit card for a couple of years after finishing my Ph.D. because of expenses connected to relocating, starting a new job, sudden need for a new computer, and my spouse's job search. But that was easier in the days of the teaser rate for balance transfers; most of that debt I paid off at 2.9% interest. And I could afford to do it because my paycheck was large enough to cover our routine expenses with enough left over to make a payment on the card every month.

Since then I've continued to use my card regularly, but like Sapience, I pay it off every month. My current card gives me 1% cash back. And by using the card for utility bills and other recurring expenses, I avoid giving my banking information to too many companies.

And as I found out when pickpockets got my debit card in Poland some years ago, credit cards have much more robust fraud protection than debit cards: with a debit card, you can get your money back, but it's unavailable until the bank refunds it, whereas with credit cards, you can contest a fraudulent charge and you're not out of pocket. Since I travel overseas frequently, I use a regular old-fashioned ATM card, not a debit card. Even if the card is stolen, it's useless without the PIN.

Notorious Ph.D. said...

I'm with you on most of these, but I'd add a caveat to the student loan thing. I was fortunate to get out when rates were at a historic low. I have an absurdly high student loan debt, but the whole thing is set at 3.25%, fixed. Will I ever get cheaper money than that? I doubt it. So this is a case where paying one of my debts down quickly is not necessarily a priority.

Susan said...

Wise advice. When I was in grad school, I got a Sears credit card to begin to get a credit rating. My mother gave me that advice, as when she was divorced in the early 60s, she had NO credit rating at all.

The advice about the reward cards is good. There are a few that even give 2% rewards. As someone who does work in Europe, I'm a fan of Capital One because they don't have an additional transaction fee on the international activities.

FrauTech said...

Great advice TR.

Have to semi-disagree with Sapience on the card with rewards. Not only do 99% lack the discipline to really do that well, but also (like TR said) not only do cards make us spend more but I bet having a card with "rewards" makes us spend even more.

Also disagree with Notorious, those who lengthen student loan payments so they can "have better credit" or because their "rate is so low" are fooling themselves. Interest is interest. I like Michelle Singeltary at the Washington Post and the way she reminds us that ALL DEBT IS BAD. Yes you usually have to take on a mortgage but supposing that there is good debt or cheap money is okay is a crazy justification. Not saying that means we don't have to make tough choices, but that I feel like the motivation to pay off any and all debt (credit card, student loan, even mortgage) should be much higher in our society.

Also Flora's multiple account idea is brilliant, I am going to have to think seriously about that.

Anonymous said...

Great post, TR! I'd like to quibble with a piece of advice you gave, though. In the current housing market, there can be great benefits to buying a house instead of renting, assuming you're willing and able to buy a short sale or foreclosure.

I hadn't considered buying a house after graduating for precisely the reasons you mention...but, my partner, a fellow Zenith '08er, suggested we look anyway. In the end, we snagged an amazing place for insanely cheap-- instead of paying our old monthly rent rate, we're able to make nearly double the required monthly mortgage payment on our house AND put away $600 each month.

Ooobviously we got a good deal, but I know that we're not the only people these days who managed to buy a dream house for less than $100k. Buying a condo or apartment, especially in a major city, is a very poor investment, especially right out of school. Still, that doesn't mean that buying (instead of renting) is always a bad plan. Even with property taxes, utilities, and the added costs of homeownership (a new water heater! a leaky well needing repair!) we've managed to come out ahead financially by buying opportunistically. Just sayin'

Anonymous said...

I definitely live in a financial bubble, having lucked out with my parents. (They taught me things like not taking on debt, paying off credit cards at the end of the month, etc.)

HOWEVER, I have found myself at a disadvantage because of these ingrained values. How?

1. I always brown bag lunch. This is because I can't afford to eat out (and also make my financial goals). Therefore, in the past, I have missed on important meetings and social opportunities. At my first real job, when I was 22 and making 15,000 a year, I didn't realize how important this was. My young coworkers made connections because they were willing to take on debt.

2. I won't/can't/won't buy expensive clothing. I spend a decent amount on pants that I like, but I can't afford to buy lots of new clothes. As a result, I feel like I rarely look as nice as my colleagues. (Please, please don't tell me to shop the bargain racks and eBay. I do that, but I don't have the time to do it well.) Looks count, not only in front of my colleagues, but also for my students.

There are more examples of this. But when we live in a society structured by debt, stepping outside of these norms can be hard.

Contingent Cassandra said...

If your employer allows you to split direct deposits, another variation on Flora's multiple-accounts approach is to use a savings account to store money to tide you over the summer and deal with repairs and other unexpected expenses (actually, you can expect to spend the money; it's just hard to predict what will break/go wrong in a particular year). I have 35% of my paycheck (25% for summer expenses, 10% for repairs, etc.) direct-deposited in an ING account, which allows for fairly easy (but not instantaneous) transfers.

Brian W. Ogilvie said...

Anonymous @ 3:53: One of the great things about my department when I arrived was the lunch group that met daily at the Newman Center (Catholic student center) just off campus. It was the closest cafeteria to the history department, but more importantly, they didn't object to brown-baggers. So those of us who wanted to bring lunch could learn department lore, gossip, and state politics from our elders while not spending money we didn't have. And it wasn't just the newbies who brown-bagged it: one of my senior colleagues always brought the same ham and cheese sandwich that his wife made in the morning before they both went off to work.

A bonus was that the food at the cafeteria was pretty cheap, so when I didn't have time to pack a lunch, I wasn't spending too much more than usual.

Dr. Koshary said...

Good advice, as usual, TR! I second the call for new graduates to exercise self-discipline. Seriously, people. Do not take your cues on lifestyle from people trying to sell you things. You do not 'deserve' this or that. You don't 'deserve' anything, in material terms. You deserve, however, to not be forced into heavy long-term debt that can affect major life decisions for you down the line.

Cook your own food. Don't buy every nice suit or pair of shoes you see. In fact, buy none of it, if you don't actually need the clothes. Do not lie to yourself that simply being alive for another day entitles you to spend a lot of money on luxury goods and services. This is hard going, since a huge number of people and entities try to tell you exactly that, but it is worth the effort to fight off the sales pitches.

Northern Barbarian said...

Thank you, TR! I'm printing this for my senior seminar students.

Anonymous said...

I'm a (alas, it is far past the time when I could claim 'recent') Zenith grad and just thought I'd hop in and share a few of my experiences/thoughts as well.

Cooking my own food saved (and saves) me a great bit of money. I haven't crunched the numbers, but I believe being thrust into vegetarianism (my roomate was vegetarian and I was far too lazy to cook separate meals) saved money as well. I think my first years out of college my food budget was probably no more than $60 a month, and usually less. Granted, I have no shame and had no problem glutting myself on free food when it became available (office parties, trash cans, business meals).

Cutting out certain entertainment expenses some people take for granted like the cable bill (save internet... too essential for me, even 8 years ago) saved me quite a bit of money over the months. Heck, these days it's pretty easy to get a significant amount of entertainment via free sources (Hulu, YouTube, libraries, etc..). I am highly suspicious of anything that requires recurring monthly payments, since they can sneak up on you quickly.

I'm in the crowd that actually uses my credit card pretty much for everything. In my case, it's because my parents drilled into my head that debit cards had (have?) less fraud protection, convenience, and, admittedly, to build rewards. However, I never have a balance - I basically make my payment then pay off the amount the next day. That said, I have paid overcharge fees (small limit, large dental fees, me not realizing the default behavior of many companies is to accept the charge, despite being over limit and then charge you later. Jackasses.) so it's worth being careful. Overall, I'm still out on top since that's the one and only fee I've paid, but you do have to exercise discipline.

A second job/side work really helped me initially - the way I treated this secondary income (which was sometimes.. under the table let us say) was as bonus entertainment expense. All the income from my job proper could only be put towards necessities, but the $50 I made from helping out little old ladies with computers that month could be used for a few nice meals. Not necessarily the wisest advice, but worked well for me.. since I was lucky enough to have a 40 hour a job week otherwise.

I have mixed feelings about how to deal with the student loan - I started off paying it off very aggressively, then fell to paying just the required fee when a) the loan company offered me an interest rate deduction for setting up automatic repayment (minimal only, they wouldn't let me pay .. more) and b) the interest rate was *lower* than the interest rate of my simple ING savings account. Of course, a) only needed to be done for a few years and b) is no longer true. Predictably, I've not gone back to paying aggressively either (though I still dump payments in from time to time) - guess it goes to show how pervasive inertia can be.

And not quite relevant to this conversation (and covered in your blog before), it's probably worth setting some money aside (if you can!) to put into retirement - I've been maxing out a Roth IRA since I got out of college and kick myself for not doing it sooner. Compound interest is better when it's on your side, and I didn't find it too difficult to kick in the 4-5 a year, even at the $10-15 an hour I was making the first year or two out of college.

Perpetua said...

I just want to throw in here a word for using good old fashioned CASH for those who are on a tight budget and trying to track expenses. I've never been good at balancing my check book or graphing my expenses. So what I always did was figure out a rough estimate of what I spend per week, and add a little on top - for a while in grad school I had a well-paying and easy-as-pie babysitting job every week that equaled $75. I got it in cash and that was my spending money for the week. It didn't pay my bills (including groceries), for which I used my credit card, but I had to cover all my restaurant meals, drinking, and entertainment out of that fund. Cash can be great for figuring out exactly what you spend, when, and on what. I know some people can sort of visualize invisible money, but I work better with something concrete in my hands. But of course this system takes a lot of self-discipline too (no mid-week runs to the cash machine or using the credit card to pay for that morning coffee).

LouMac said...

I'll third the recommendation of credit unions. My state employee CU is fee-free in all respects, and provides almost all the services of a commercial bank.

I've used the software Quicken since I was a grad student. I swear it is THE reason I was/am able to budget. It helps with creating a budget in the first place, setting up and tracking categories of spending (and you can get quick answers on anything - e.g. "how much did I spend on coffee / my cat / books / medical care / all or some of the above, last year / month / etc.") It alerts you when your spending is over budget. And in addition, I find it rather fun to use - there's something very satisfying about clearing up a pile of receipts by entering them into the register, and it makes a nice "cha-ching" noise when you do! I almost look forward to doing it - and I would probably not do that kind of financial management without Quicken (I never manually balanced checkbooks or c-c statements). I spend very little time doing it - at the most 45 minutes a week once it's set up - and I use a very old version (1996 I think!). I don't have it linked automatically to the internet, because that scares me a bit, but if you like you can have it automatically download statements from your bank.

Another big saver over time has been my coffee / tea habit - I take a travel mug full with me in the morning, and when I do go out for coffee, I drink drip rather than espresso.

Mrs. Northern Barbarian said...

Well, I run the finances in the Barbarian household (yes, we do have more than yak skins) and I am going to come in on the side of "some debt is acceptable." Of course, this depends on how much debt you graduate with, whether it's guaranteed or private, the interest rate, the rest of your financial situation, but ...

When I finally left the friendly confines of my medium-sized state university, I had a master's degree in a technical field which enabled me to get a job and stay employed (mostly). When I made that last loan payment, I thought, "now there was a government program that worked the way it was supposed to." I was able to borrow money on favorable terms to gain an education which enabled me to be employed and have a standard of living which I otherwise wouldn't have been able to. Wish all government programs worked that well!

Again, it depends on each person's own situation, but I was able to make my loan payments and still eat, fix the car, heat the apartment, and save for that emergency fund we're all supposed to have. And this was at 7% interest, which now seems high compared to the 3.25% which another commentator quoted. So I'm with Notorious Ph.D. -- why pay off that cheap money early? Start that emergency fund, save for retirement, do something else financially sound, but I don't see the need to stretch your finances thin just to pay off a debt when the debt itself is not a problem.

Tenured Radical said...

Thanks, Mrs. Barbarian! I think that advice also goes for those of us who have mortgages in the 3-5% range, although the idea of having no mortgage at all is terribly seductive for me, and I am planning to buy my next, much more modest, house for cash.

That said, the big factor here is: are you -- or are you not -- a person who is particularly vulnerable to magical thinking? It is in part a question of self-discipline, but so many other factors fall under that category: do I buy things when I feel bad? Do I feel the need to award myself prizes for doing ordinary stuff like correcting a stack of papers? How many pairs of shoes/jeans can one person wear? Does shifting a balance to a 0% introductory offer relieve my anxiety so that I feel ok about running out to put a fabulous dinner on the card that I don;t really have the money for? etc.

Anonymous said...

I'm in the camp of those who use a credit card for almost everything, but pay it off in full every month. I learned this from my parents, and have been able to reap the (usually airline ticket) rewards. But my sister ran into trouble with this, so I understand how it's not a good move for everyone. But for someone disciplined and not susceptible to random extra purchases, it can be savvy. If you run into credit card issues, the best thing to do is what my parents (wisely) made my sister do: get a bank loan at a reasonable rate to pay off the credit card debt, and then only use a debit card or cash. This limits the acceleration of interest and, I think, restabilizes financial thinking.

I also think people need to be really self aware about what they need and what they can live without. I've always lived with roommates, never paid for cable, and cook most of my meals. But I can understand how some people need to live alone, and spend a little more on a crappy, tiny studio while I spend less, live a little farther away w/roommates, and live in a nicer place. I know that I need to like where I live since, as a grad student, I spend a lot of time working at home. But for someone who values privacy over aesthetics, it might be worth it to shuck the roommate and live in a tiny, dingy place. The important thing is to recognize the trade-offs and make decisions that align personal needs/values with personal finances.

Mrs. Northern Barbarian said...

Well, I've certainly gone through periods when I seem to have assumed that if I looked the part, I was the part; or if I bought the book, I had the knowledge. Currently, my magical thinking tends towards the belief that if I enter that buzkashi tournament (er, triathlon), then I'm really an athlete (despite the way less than ectomorph body). Credit-wise, most of my magical thinking seems to have been fairly cheap, so I was fortunate in that regard (until reality so caught up with me that I was forced to admit that I had no musical talents, either -- a distinct social disadvantage, out here on the steppes, but oh well).

Anonymous said...

Good post. What about assistant professor debt, though? Needing clothes seriously, having research and teaching expenses seriously, needing to go to conferences seriously, and all that advice about not taking on extra jobs because you must spend every extra minute on writing? What about that promise that you will be able to pay it all off when you're senior faculty -- and when that didn't happen? And -- I do see in retrospect, or now when repair time has hit, that buying the house was a bad idea, but there really were no even marginally decent apartments at the time and the cost to get into one was more than the initial cost of buying the house. And I think I'd have cracked up if I hadn't had somewhere to pleasant to go after work. So... what to do???

Anonymous said...

Aha: re magical thinking about money, when I was an assistant professor I was taught it was "unhealthy" not to think that way.

Now I am thinking more along these lines: if I live within my means, I will not be able to travel until I am too old to travel the way I like to (cheaply).

I love this post but I sometimes think posts like this are for people who have more money than I do ... I, if I saved, would have a little money, but no fun, or so it seems to me. (Right now, for instance, it costs $50 to get to the local research library and back driving and parking, and there's no bus.)

Anonymous said...

I always come late to these posts and then think about them for ever. On personal finance posts, I tend to think: but these frugal people all seem to have double incomes or somehow more money than I do!

Anonymous said...

I see that my assistant professor debt was recent grad debt. I am not sure how I could have evaded it, though -- job market expenses, conference expenses, book expenses. In a more opulent state or if we didn't have to keep up with our better funded US colleagues to make tenure, then maybe. But I'm not sure. I think the advice I had already gotten and then got more of, to "invest" now by going into debt because it would lead to a higher income later was really wrong. Taking on the night classes, for instance, wouldn't have given me less writing time; it would have occupied the time I otherwise spent worrying about money.

Anonymous said...

Now I'm looking at the books and it looks like this: to stay out of debt either never travel again, or get a roommate (in a one bathroom house, hmmm, it had better be a foreigner), or come up with some really good sideline. So I am guessing, become and Air B and B and develop a consulting business.

The never travel again idea is really depressing -- I got into academia because I loved foreign travel -- so I really don't know. I already do most of what most people here suggest, and it's the traveling and having my own living space that make life worth living.

Anonymous said...

So I'll stop hogging the thread but I do see: I need the air b n b and I need the consulting. I will work on this.

I am also wondering: is it really true about not buying lunch? I mean, what if you relax and have a plate lunch at the working men's joint and then just have fruit in the evening, or some sort of soup? Thus saving on all the high cost of groceries, gas to get same, and energy for cooking? Or, go home at lunch time and cook, and work into the evening with coffee from the coffee stand? This is simple and South American....

Tenured Radical said...

For those of you who are mulling over the choices, let me just say:

If you got into academia for certain pleasures -- whether it is reading, travel, whatever -- and you are buying those pleasures by going into debt, a radical rethink is in order. Every time you take out another loan -- whether it is a 10.00 lunch or a $700 research trip -- you are circumscribing your future freedom and happiness. I know this is one of those moments where people start leaving comments about my privilege and whatnot, but it seems to me that at a certain point you have to decide whether the things you care about in life could be obtained without driving yourself into bankruptcy -- or worse, those years prior to bankruptcy when you worry about money constantly.

Books? There are libraries. And I say this as someone who for decades has loved the books as objects and tokens of who I am as much as I have loved what is in them (sounds like a post....)

Lunch? It is possible to go out to lunch sometimes without committing to going out to lunch as a way of life. If I went out to lunch every day I was at work, it would cost me close to $200/month. Actually, I can afford this on my salary, but most people can't, and anyway -- they aren't always very nice lunches. In both buildings I have worked in at Zenith there has been a gathering place where people eat lunches they either buy or bring in, and that is network-y (or gossip-y, depending on what you want from it.)

Roommates? I got to a point when I decided that I never again wanted to live with someone I wasn't intimate with, and there was a price to pay for that. But do you really want to take on debt, at X% over 30 years, for the privilege of being alone? Wouldn't it be better to find someone who was willing to live with you respectfully?

I think one of the most confusing features of all this is the distinction between "want" and "need." If you can make that distinction, then you are someone who can trust yourself with a credit card. If not, not.

Iron Curtain said...

I am finally free of WachoFargo and their nefarious ways of bailing out their drug money laundering execs with what should have been my interest money. Now I am fully in a community bank that even reimburses ATM fees from other institutions-- and a free waffle iron to boot.

On the house thing, I'm a longtime renter and very happy. If anyone has plans to go to grad school, rent even when people try to tell you that the 5-7 years you'll be in school is long enough to buy. You'd rather let the landlord deal with the plumber while you read for comps. And don't forget condo fees which, like rent, go up up and up.

I know too many people who bought a house at the start of grad school pre-bubble pop and now cannot sell that house at all-- much less for the price they paid 5 years ago. Might as well just go to Mohegan Sun with what you'll save in condo fees, yard work, and that new water heater.

Anonymous said...

Well, my assistant professor debt was actually VAP debt. You had to go to the hiring conferences and had to pay moving expenses. I thought at the time it would be more rational just to go into industry, and I was right.

Lunch here, $200 would cover 30 days a month and you can take half of it home for dinner, they give you so much. Groceries and natural gas are high, you really have to watch it.

Research trips, well each one doesn't have to cost $700 but we don't have a viable library / JSTOR etc. so ... gotta go on 'em.

Anonymous said...

My foreign travel doesn't cost more than staying home since reduced cost of living abroad plus not running a/c, burning gas, etc. at home pays for the ticket.

What's killing me are visits to aged parents in expensive state and home maintenance. No way to really make room for in budget, they're big chunks. It's either roommate or increase income or both, because anything else I can do wouldn't save enough to be worth the aggravation. I must start a consulting business and become a bed and breakfast.

Anonymous said...

I see I need a Roth IRA and I agree that all debt is bad. And I'd really think twice about home ownership if I had it to do it again or when I do. I am not sure what else I'd do differently other than prioritize income more. We were expected to be noble professors and not care about salary but the fact is, we went flat at a certain point, research funding was pulled and cost of living started to climb, and I've been scraping by since all this started.

Anonymous said...

I see that when I could have saved small amounts of money, that would have added up, is in graduate school and in my first couple of tenure track jobs. I didn't do it because of having been raised on the theory that it was unethical or unworthy to have enough money to save … my parents were always at zero or said they were, it was part of the Bohemian image or the we have rich relatives image, whichever mode they were in. I'd give what I could have saved to charity. It was nuts actually as I did not even *think* of saving – I just thought that since I had more money than I needed that month, it was my role to redistribute!

Anonymous said...

I think this proves that all my professors, colleagues, and family were wrong! The cant was, stay in academia at any cost because tenure is job security and you won't have that in any other industry.

Plus, to them everything else was crass. Going into something paid at a viable rate would prove one was never a serious scholar and was always a mere dilettante, and/or that one was made of lesser stuff (professors and aristocrats and artists and the proletariat of course were the only viable people).

I said, if I don't go into industry I'll always be broke and will not ever, necessarily, be able to live in a city -- given real conditions and places I kept getting actual academic job interviews and offers.

They said, it gets better; I said, I don't see how, because playing the academic job market is more like playing the lottery than like making a realistic career plan.

All of this proves that the better financial analyst was me, and therefore, the only one of all of these people qualified to go into industry was me. I think they were only saying these things because they had no idea what else they would do themselves.

I think it was also because I was a girl and not supposed to go out into the world.

--Glauber Rocha

sptc said...

But so, since this post terrifies me, I have talked to the people at TIAA-CREF.

It appears that I'm right: advice for those who do not have the hope of ever being "comfortable" is different from advice for those who do.

TIAA-CREF guy says: be very frugal and you can retire at a normal age, living where you are in a very frugal way. (To me this means, sign own death warrant now, why live if that's all there is, why not just change careers now if there is no more life than that to be had doing this?)

TIAA-CREF guy says the alternative is: carry on as now, wait to retire until old, at that point you can move to where you'd actually like to retire.

Anonymous said...

Et voila. I'd still rather have a lump of savings sitting around, or a house with enough equity in it so I could just sell it and pay for law school in cash, and blast off into the stratosphere not of money but of interesting careers.

I still wish our library had bought books this century and that it still subscribed to JSTOR and so on, so I wouldn't have to drive around so much.

I still wish I'd been advised differently as a child and that things had gone differently back in the 80s and early 90s. Had I not banked on the future so much, I would not be trying to choose between research, travel, and home maintenance money now.

But on vit, n'est-ce pas?

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