Young & Broke
Over the last month, we have all seen the news articles about college graduates with large student loans. All fingers have pointed to college costs which have significantly increased over the years as the main culprit of their debt. Yet, before we blame it all on college costs, there are other factors that should be considered as well. Some obvious factors include minimum wage not going as far as it use to and the costs of keeping up with the latest fads (e.g., I-Pods).
Yet, a main factor that we dance around is not having a good financial education class in our high schools. Thus, we learn financial lessons later in life. Some of these financial strategies that can be applied by college graduates, college students and high school students are:
• Live on what you earn, not on income streams that are temporary
Over the years, many adults have lived on investment earnings (first with internet stocks then with home equity) or lived on their bonuses which could fluctuate over time. Yet, as these investments slow down in growth (or lose money), the extra income stream dry up. And, with a change in the economy, the bonuses that at one time they could count on decline as well. This creates a recipe for financial disaster because it is hard to downsize after becoming use to spending at a higher income level. Imagine cutting just 5% from your budget. And then think how hard it would be to cut your budget by 10% or more all at once.
Yet, this is what we expect many young adults to do when they get their first real experience with financial independence. By the time that children are ready to go to college, their parents are in their 40’s and 50’s and close to their highest standard of living. Parents are able to provide the basic food and shelter expenses. Others are able to treat their children to cars on their 16th birthday and take them on nice vacations. Meanwhile, their children are about ready to enter their lowest standard of living due to low salaries and needing to pay for their own food and shelter for the first time. Many children have used their high school jobs to pay for clothes, transportation and entertainment. As they leave home, they will have to pick up other costs that their parents have paid for like food, shelter and transportation which usually will eat up most, if not all, of their income. This is a dramatic shift because all their income use to go towards clothing and entertainment to having their income now just cover the basic needs (with no extra frills). Imagine how hard it will be for these young adults to downsize their standard of living if we have a hard time just cutting 5% from our budget? No wonder many graduates need to live at home.
• Plan for college like retirement
In a Fidelity study , 75% of teens who plan on going to college have started to save. Yet, 64% of college bound teens do not know much college will costs. How can they save enough when they do not know how much college will cost? High school students usually do not get serious about thinking about colleges and visiting college campuses until their junior year. Is this enough time to save for college? Would we suggest that workers wait until they are 55 or older to plan for retirement? College bound teens should start the planning for college as they enter high school. This way they know how much they need to save while working or need to plan on scholarships to fund their college costs.
• Find alternative income streams (e.g. scholarships)
Many today are looking for investments that will give them an extra income stream. Yet, these income streams do not appear out of nowhere. They usually take several years of savings and investigating to find and set up. So why do high school students wait until their junior and senior years to find scholarships? By this time it is too late to change their resume in order to qualify for certain scholarships. If they start looking in their freshman year at what they need to qualify for some scholarships, they will better understand the GPA and extra curricular activities that they will need to optimize their income streams in college.
• Make extra payments towards debt
We have become more aware that the easiest way to get out of credit card debt is to make an extra payment. If an extra payment is not made then credit card debt will take 25 years or so to pay off. The same goes for a college loans. Yet, as young adults receive raises in their 20’s, many have used the extra money to either maintain their lifestyle (already spending beyond their means) or to increase their standard of living. Then they find themselves in their 30’s raising a family and not having the extra cash to payoff their student loans. David Bach’s Latte Factor™ could be applied to college graduates. Yet instead of coffee, the factor could be based on beer (saving $5 or more by forgoing a beer afterwork).
To learn more about financial lessons for college bound students read College Planning
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June 28th, 2006 at 8:11 am
Ideally, that would be the way to prepare kids for The Real World. I absolutely agree with the method. But the problem is that in practice, it rarely works that way. This is because of a variety of forces, both internal and external, that can derail even the best laid plans. These include:
- well meaning grandparents, aunts & uncles, etc. who continue to spoil the kids no matter what the parents tell them
- the parents’ own middle class standard of living, which includes the child while he’s living there, and forms the basis of the child’s expectations
- peer pressure, sometimes direct and sometimes suble, from other kids, TV, movies, Internet, etc.
It’s often not possible to curtail the misguided generosity of grandparents and other relatives. While you can set aside the money these folks give young kids, it’s hard to do that with teenagers. Teens don’t show you the cash-stuffed envelopes they receive from Grandma and no matter how you explain to your mother/sister/ex-husband that you’d prefer your child not receive excessive and ongoing sums, she/he disagrees and continues to send money. So eliminating this often large income stream could mean terminating a relationship, which would be detrimental to all involved. It’s amazing how many relatives think they’re doing kids a favor by giving cash - and it really adds up, even in a relatively small family.
When parents themselves have some extra money, how can they not include the kids? How can you exclude the kids from eating out, vacations, etc. and still build a solid family with a sense of togetherness? Interestingly, it doesn’t even take a huge house and fancy cars these days for kids to feel privileged.
Then there’s peer pressure. You can not buy your high schooler a car when all her friends have cars; not lavish her with $25K+ Sweet 16/Bar Mitzvah/etc. parties; and generally try to downplay the materialism, but she’ll still find a way to get herself an IPod, all the latest makeup and hair products, closets full of clothes, etc. In her world, everyone has these things and it’s normal.
Part of the problem, I think, is the growing up process itself. It’s a bit of a Catch-22: as the kids grow up, parents try to give their children more responsibility to prepare them for adulthood. That means allowing them to make more decisions about their own money. But many times, those decisions are frivilous and short sighted. The hope is that the kids will have successes and failures, and learn from both. But for kids to really learn, you have to let them really make their own choices - you can’t, for example, give them a choice between depositing their birthday money in the bank or applying it towards their college fund.
Then there’s the aspect of keeping the peace at home. When the child puts you under seige to force you to back off and let them spend their money as they like, it not only affects your own happiness, but can also impact your marriage. That’s the point at which I say: okay, if you won’t learn these lessons from me now, maybe the world will teach you these lessons later. So far, the world has been doing a pretty good job….
July 9th, 2006 at 1:19 pm
Personally, I think fewer kids should be going away to college. But looking at your points, 4 years is nowhere near enough time for a teenager to save a relevant amount of money, given what college costs now. However, allowing kids to budget their own money, and perhaps experiment with loans and interest by borrowing from their parents might be very helpful in letting them learn about credit management in a safe way. Kids should also be taken out of their middle class neighborhoods from time to time so that they understand that not everyone has the things they take for granted.
I just posted my own thoughts about saving for college for my young children http://novatowi.blogspot.com/2006/07/saving-for-college.html