First things first: so in a fiery fit of pre-summer-employment-already-watched-ten-episodes-of-The-Office-boredom, I pounded all this out right now in the span of about three hours. I decided to publish it immediately because that’s more fun, and I surely have not proof read it or given a terrible amount of additional thought to the subject matter after putting fingers to keyboard. Thus, I apologize if my rant upsets anyone or if any of the information is not properly represented here.
A preliminary plea: if you find any of this rant remotely interesting/helpful/humorous/not-totally-stupid I ask you to please share it with people. I write for two reasons: 1) To be heard 2) To improve my skills so I may be heard later. So if you want to post about this somewhere or email it or snail mail it, I whole-heartedly encourage you to do so.
Now finally: I fully recognize that I am no expert when it comes to any of the stuff I am about to talk about. However, I do read a lot of stuff written by experts, and what’s more, I observe some interesting financial behaviors across my social groups that I feel are worth addressing. In this medium, I speak predominantly to an audience of my peers, and thanks to those handy website analytics, I know at least some people are listening. So I would like to take advantage of my small pulpit to conglomerate and share some important financial information that I have learned, mostly from reading, but also from experience that some of you may not have been fortunate enough to gain. I target my fellow young adults in particular, though the advice is certainly sound for everyone. The truth is that most people, let alone young Americans, are remarkably bad at managing their finances. So here is some compiled information, distilled as best I could make it, to help combat the issue:
Big Picture: Americans and Moola
Since the recession, the Fed has been taking huge amounts of data regarding how the typical American is doing financially. This last May, they released some of the latest findings from their 2014 surveys. One of the most shocking discoveries, as they put it, was that “Forty-seven percent of respondents [said] they either could not cover an emergency expense costing $400, or would cover it by selling something or borrowing money.” Now, keep in mind that this study was supposed to be reflective of American households across all income brackets. In other words, this is a crazy alarming statistic. $400 emergencies are not hard to come up with: the car you rely on to get to work dies, a tree falls on your house, you fall from said tree in a different scenario where it does not collapse on your house, but you wind up breaking both your legs, or maybe you’re from Idaho and the University of Minnesota jacks up your tuition by over $12,000 a year. My point is: disposable income is pretty low in the land of the free. But maybe that’s just because the money is locked up in less liquid savings funds such as a Roth IRA? If you can’t tell from the sarcastic tone I hope was conveyed, this is not the case. From that aforementioned study, we learn that 39% of Americans based off of the survey have given little to no thought to saving for retirement. What’s more is that a whooping 31% have absolutely nothing saved (and are without pension). You don’t even want to hear about student loans (I’ll get to that later), so instead here are some credit card fun facts: the average credit card debt per household in America stands at nearly $6000. However, if you only look at the households that carry a balance (meaning we don’t factor in those that don’t carry debt), the average of those households is in the hole by over $16,000. Not too good. But anyways, I know most of you still reading this are young adults like myself, and may feel these numbers are not super relevant to you. In a lot of ways, you are right. Big scary financial studies don’t necessarily mean much to all of us young people, especially those of you that come from an affluent community like Lakeville, MN. Not to mention the fact that statistics are easy to manipulate, misunderstand, and lack the emotional investment I may have gotten from you had I used anecdotes instead. Lucky for you, my point does not lie in the preceding paragraph. That was just to fill you up with some fun facts to share with chatty uncles at the next economic dissertation during your family get-together. And also to get you in the mood to talk about money. Carrying on…
Silly College Kids and Debt
There are plenty of statistics I could share here about the massive amount of debt accruement in our country in the name of formal education. I could talk about the value of a degree and the pros and cons of other options (there are lots), and maybe I’ll write more on it later. However, for now I’ll try to keep it closer to home. The Star Tribune ran a piece in 2014 where they talked about a national study that found Minnesota to have some of the worst student debt in the country. As it read: “Seventy percent of Minnesota college students graduated last year with at least some debt. The average debt load for a state college student that year was $30,894.” As taken from The Institute for College Access and Success, here is some interesting info regarding average loan amounts of students with debt at various Minnesota schools:
- Mankato State: $31,568, 74% graduate with debt
- Cloud State: $31,953, 74% graduate with debt
- UMN: Duluth: $31,244, 76% graduate with debt
- UMN: Twin Cities: $26,796, 61% graduate with debt
- Winona: $35,131, 76% graduate with debt
- Carleton: $18,302, 39% graduate with debt
- Gustavus Adolphus: $36,636, 76% graduate with debt
- Hamline: $36,006, 82% graduate with debt
- Macalester: $24,156, 68% graduate with debt
- Minneapolis College of Art and Design: $33,400, 88% graduate with debt
- St Olaf: $28,396, 60% graduate with debt
- St Scholastica: $42,792, 77% graduate with debt
- St Thomas: $36,497, 57% graduate with debt
(After brief moment of silence) Wow (Another brief silence). Pretty bad, isn’t it? Part of the issue with MN in particular is that we have such high participation in college, so obviously there’s going to be more debt as people with lower incomes go to school. Debt isn’t even necessarily a bad thing. It is a tool, allowing people without the means to attain opportunities for economic or social advancement. However, that being said, do you really think taking out over 40K to get a degree from St. Scholastica is an economically intelligent decision? It’s not a selective school (81% admission rate), so why on Earth would you take out the money to go there when we have way more affordable state schools? Then again, let’s look at Winona: nearly 80% of students are graduating with an average of 35K in debt. That’s not too much less than St. Scholastica, whose total cost of attendance is nearly three times as much as Winona’s! Now, there are surely some pretty interesting factors going into these numbers (another article to write?), however, my point here is that your choice of college location can have a huge bearing on your economic situation. It’s information you already knew I’m sure, but now you have some actual numbers to back it up.
Here’s a little anecdote for you too: so last year I looked into going to Carleton. There numbers look pretty good, don’t they? I was thinking so. They have the lowest proportion of students graduating with debt, and the least amount of debt for those that do. However, keep in mind that numbers cannot be blindly applied to everyone. Carleton didn’t offer any amount of aid to me and they don’t give out academic scholarships (funny enough, they did give me the “William Carleton Scholarship” which held no monetary value). So despite the good numbers, it would have cost me just over $64,000 each year to attend, while the good ole U of M came in with a far more generous offer (and what I believe is a better program). So, despite the numbers, you do have to look a tad closer at these schools when figuring out what it would cost you specifically to attend.
Going beyond your choice of school, what you decide to major in has a far bigger bearing on your financial outlook as well. Of course, you already know this. But what you might not know are the statistics released behind different majors. Below, I hastily threw together a (kinda confusing) chart of different majors from the University of Minnesota (all campuses) Class of 2013 and reported earnings for the FIRST YEAR after graduation. Now, I will admit that I do not fully understand the raw data. For starters, there is shockingly little information out there regarding this information. The only colleges at UMN: Twin Cities (to my knowledge, and I asked around) that even release the data are the business school (who only releases it to enrolled students) and the engineering school (woo CSE pride!). I take plenty of issues with this information, and both reports seem a bit overestimated and don’t comment on the employment percentages. However, I know UMN: Duluth has a fairly comprehensive fact book they put out regarding income information. The data below came from the Minnesota Department of Employment and Economic Development, which has a data tool which allows for the not-so-easy breakdown of the less-than-ideal numbers. The majors I have listed below were about all that they had stats for. Most majors didn’t have enough data for them to post accurate averages, and there were huge holes in most of the colleges for finding any useful information. I could easily write another article about the need for more transparency and surveys regarding graduate incomes, but for now, this will have to do. Although some of the employment numbers seem hard to believe, this is what was reported (pretty cool graph, huh?):
University of Minnesota: 1st Year Annual Wage and Employment
Crazy, right? Considering that this data comes from all of the UMN campuses, and given the range in both rigor and programs across them, I believe this is a fair representation of the numbers across most of the state, and probably most of the country’s public universities for that matter. So look at this: at Gustavus Adolphus College, 76% of graduates have an average near $40K in debt. This school has no engineering programs and more or less no business ones as well. That knocks off about every job with starting salaries reported over $40K per year, and employment percentages seem to be wavering under 40% for the remaining majors. This lines up surprisingly well with PayScale’s estimate of Gustavus grads having early career incomes of $41,100 on average. Most kids are taking out Direct Unsubsidized or Subsidized loans from the government, whose interest rates average out around 4.6%. For the sake of rounding, and also because a good chunk of kids are taking out higher-interest private loans, we will just call it 5%. So that means our Gustavus graduate is getting hit with a little under $200 a month in just interest. On a $40K yearly salary (if they found a job right away), it seems like Gustavus may or may not be the wisest choice for the average student that attends, based purely off the statistics.
Another thing that continually amazes me is the way some of my peers, who are taking out loans, spend money. In finance, there is this thing called “The Rule of 72” which states that the number 72 divided by your annual interest rate gives you the number of years it will take for the balance to double. This can be a great thing in the case of wise investments, or a bit of a nightmare for debt-straddled college kids. So, keeping this in mind, if you took out $30K in loans with 5% interest, it will take 14 years for your debt to double if you just let it sit. Now, when you go to Chipotle with friends and throw some guac on that burrito, you are in no way paying the mere $2 extra. If you theoretically take until you’re 36 to pay off all of your student debt (thus preventing it from doubling since the interest payments reduce with the balance), that means you are doing monthly payments of $250 for 14 years, and effectively that bonus guac costs not $2, but $3! In fact, the $7 burrito you just shot-gunned works out to actually cost you $10.50! That is right, if you look at it as if the money you are spending could have instead been spent to prevent the unstoppable force of compound interest, in the situation I have laid out here, everything you buy effectively costs you 50% more in the long run. And that percent varies depending on A) how much debt you have B) the interest rate, and C) how long you take to pay it off. SCARY STUFF. So basically, if you are spending your extra cash on anything besides paying back the bank, ask yourself seriously whether or not this thing is truly worth it (and avoid getting guac).
I fully recognize that there is a plethora of reasons that go into picking which college you go to or what you major in, but what I’m trying to say is that there are real numbers out there I fear many of my peers are not taking advantage of. As seen in my previous graph, the difference of earnings and employment across majors is monumental. Yes, there are certain people who can major in absolutely anything, regardless of the stats, and do more than fine; however, to the average student, these decisions will matter. Doing what you have a passion for is indeed something to consider, but taking into account the sort of lifestyle you want to live also has its place. Coming from a somewhat affluent community, I know plenty of people who are going to school and studying fields that likely will not be able to afford them the luxuries they had growing up. There is absolutely nothing wrong with that, but these people have to recognize the reality of what they may be getting into. There is immense value in the liberal arts; we need writers and chefs and historians and teachers without a doubt. However, there is also value in recognizing your own unique situation. If you’re broke and majoring in art history, but you don’t REALLY REALLY love art, maybe consider something like finance or computer science.
Now Some Fun Stuff (Saving Money)
Let’s pretend you are one of the chosen few who have successfully cracked the great enigma of college finance to the point where you are not strapped down with debt. CONGRATS! You are probably a pretty privileged person who needs no congratulations, but I wish it to you nonetheless. Now, in between piling on the extra-guac, you may ask yourself: “Hmmm, as much as I enjoy mashed avocado, is there any better way to spend my money?” and the answer would be: “Most likely!”. But all overused Mexican fast-food chain jokes aside, you don’t need to be rolling in it to think about how to best save your money. If you have absolutely any money to your name not being used to climb out of debt, how to best save it must be on your radar. Thanks to some stupid financial jargon made up by crooks, this may seem pretty scary. I really don’t understand most of it, however, I do know that the most important rules to follow are pretty easy to grasp.
First off, if you have any amount of cash sitting in a savings account not being used for some crucial purpose (paying off debt, paying your rent, affording groceries, etc), you should think of it as a heap of avocados sitting in an old paper bag. What happens to them? They start to rot and go bad. JUST LIKE YOUR MONEY! Why is that? Inflation. Here is a handy chart of it that I stole:
(Begin digression) Every year that the rate is positive, that money you have in the bank is losing value. For instance, if you were born in 1997 and your generous grandparents gave you $10,000 in cash for college tuition, and your brilliant parents saved it for you in a fireproof safe, you wouldn’t be in a great position today. Obviously this is because the cost of college has risen over the years, while your cash value has not (Comment: I recognize this isn’t the greatest example since the cost of college has actually far outpaced inflation, however I think it is particularly fitting to the article as a whole. In this instance, I am using college to represent all goods and services in our economy, each subject to inflation). For instance, in 1997 the University of Minnesota cost only about $12,000 to attend, while today it is closer to $24,000. In other words, your grandparent’s gift would have been much more valuable in 1997 than it is today. This begs the question: is there any way you can save your money to combat inflation (and more)?
Well of course there is! (End digression) Your savings can be invested in a myriad of ways. You can put it in stocks, mutual funds, bonds, real estate, precious metals, or even collectables (this is not the wisest choice). I am far from an expert on any of these things, though I do have a little bit of experience with the stock market, and have some things I would like to share. If you’re interested in the rest, Google is just a click away. Seeing as the digression has ended, I will spare you my best attempt at an explanation of how the stock market works (here is one). Instead, here’s what works for me:
I am a bit of a believer in what’s called the “Efficient Market Hypothesis”, or the belief that no one can (legally) “beat” the stock market. It is the idea that stock cannot really be overvalued or undervalued because all relevant information is reflected in the price. You should be investing for the long run as a young college kid, and it is with the long run that the EMH concerns itself. It is fundamentally a boring idea. It takes away the excitement of Wall Street and the idea of “skillfully” picking stocks. It is the acknowledgment that, although no one can predict the market long term, the trend over many decades has always been (and theoretically shall remain) upwards. Thus, the most efficient way to invest your money is directly in the market. Cue Index Funds.
A mutual fund is basically a collection of stocks, allowing an investor to diversify without needing to buy shares of each individual company (more expensive). An ETF is like a mutual fund acting as a regular stock. Mutual funds can be managed or unmanaged. Managed is where some big shot with a team decides based off of their research which stocks are going to perform well, and then they buy and sell shares of them accordingly. You are basically investing in their picking abilities. There are also higher fees associated with this. Conceptually, it is pretty similar to a hedge fund. Meanwhile, unmanaged is where the stocks being chosen are picked based off of a formula, not to be changed. The simplest example of this is the index fund, such as the S&P 500 index (SPY) that is a collection of the 500 biggest companies in America. There are countless different index funds, but the premise remains the same. Plus, there are virtually no fees. If you haven’t drawn the dots, this aligns itself incredibly well with the EMH.
Oh but doesn’t that sound boring? You want to be like your friend’s cousin who you hear made $10,000 in a week off of his good stock pickin’. Well, whether that is factual or not, in the long run it is extremely unlikely that he will sustain that. And the same goes for those managed funds. They may beat the market for a while, but long term, few are going to stay alive. Here are some facts:
- There was a popular claim that index funds beat 90% of managed ones. Morningstar challenged this, asserting that the number was closer to 60%, which is still huge.
- In the years from about 2010-2014, the market just went off. Money was a-flowin’. However, out of 2,862 major managed mutual funds, only 2 beat the S&P index. Might as well just have had a monkey throw darts at a board to decide…
- Many a study has been conducted that found monkeys were able to outperform the experts at stock picking.
- Bonus article
- I don’t feel like continuing and it’s getting late, so do your own research
What I am saying is that 1) The time to invest is now 2) Invest for the long term, and 3) Index Funds are perhaps the best place to start. Don’t fall into the trap of thinking that investing is all fun and exciting. When you do that, it becomes gambling, for as we learn from the EMH, in the short term it is basically chance. Don’t be any more wowed by the big numbers you hear your friends spew about their investing than you are by the kid who says he won a grand gambling at the casino. If they’re taking those sorts of bets, in the long run they will almost surely lose. Of course, since it is chance, some will succeed, and they will be the ones you hear about, further tempting you into foolish decisions. This is what’s called “Survivorship Bias”, and it’s applied to things like hedge funds as well. The truth is that tons of hedge funds fail epically, however, those aren’t the ones getting talked about. So be weary. The strongest case against the EMH is the people who somehow consistently outperform the market in the long run (which you could argue is bound to happen statistically; another survivorship bias). People like Warren Buffet. Interestingly enough, however, Buffet got his start from a legendary book called The Intelligent Investor, which to be honest, I have yet to finish (it’s a bit of a dry read from the late forties). In it, long term investing and unmanaged indices is promoted heavily. And what does Buffet himself recommend to people? Invest in index funds. I rest my case.
(So if you haven’t, maybe go get a Fidelity or E*Trade or TD Ameritrade or whatever [all free], open a Roth IRA [avoid them taxes], and throw any excess money in SPY or some other good index)
Wow, Time for Bed
I have been feverishly typing for a while now, and it is time to call it quits. It was a fun one; maybe I’ll go into more detail on some of these topics on a later date. The truth of the matter is that nothing I shared was terribly insightful. You can find it all with ease on the internet (or the library, if you remember what those are). The reason why I did it will be my final point: This stuff matters, guys. Some of it can really seem daunting or scary, but you have to face it head on, and you can’t afford to wait. No, they didn’t teach us about stock or taxes or debt much in school, but that doesn’t change the fact that we’ll need to know it. Thank god for people smarter than us who made so much knowledge available. Tons of information is out there and ready. All you have to do is want it.