Tuesday, June 05, 2007

Times Out of Touch on GenDebt Economics

This story, "More Advice Graduates Don't Want to Hear," ran Saturday and has been haunting the Most Emailed List ever since.
Your Money columnist Damon Darlin scolds grads to save 10% of their income first, put raises away into savings, and avoid that pesky latte habit (geez, you'd think Starbucks was responsible for the financial downfall of our entire country). But I don't think his breakdown of the average grad's finances really adds up, because he totally ignores debt and other common extenuating circumstances.

"If you are only making $40,000, a not-untypical starting salary for a college-educated professional in a big city, the weekly gross of $769 works down to $561 in take-home pay after income taxes and payroll taxes for Social Security and Medicaid," he writes. "Were you to divert 10 percent of your salary to a 401(k) plan, the bottom line becomes $509."

Is his $40,000 typical? According to the College Board (pdf), for 25 to 34 year olds who are full-time year round workers, yes. Obviously, you'll make less if you are at the beginning of that age range, if you are like the 30 percent of the young workforce who finds part-time or otherwise contingent work, or if it takes you time to find a job, or if you change jobs, or if you find a job outside a big city, etc. Oh, and liberal arts grads can expect to be making more like $31,333, says the NACE.

But let's stick with the $40,000 number for a second. By Darlin's calculation, putting away 10% in savings leaves you with $1,950 a month to live on after taxes. Get a roommate, he says, like anyone in their mid-20s doesn't have 2 or 3 roommates already. But what if you're like the 2/3 of college grads carrying an average $20,000 in student loan debt? Your payment averages $230 a month.
What if (uh-oh) you ran up the average college student's credit card balance of $2864?
Your minimum payment starts at $70 a month, and that's if you start retiring the debt right now and don't add to it at all. No mean feat.
Now you have $1,650 a month to live on. Realistically, rent in a big-city share will take at least half of that. That leaves $206.25 a week for groceries, cell-phone bill, Internet access, work clothes, and everything else. Plus, since you're putting that 10% away for retirement only, you don't have an emergency fund yet either.
Is it doable? Sure. Is it easy? Nope. Does it have anything to do with expensive coffee drinks? I don't think so.


SavingDiva said...

I think that Darlin's point is that it IS difficult, but it's part of the process. The struggle is what this generation is having a problem with. People graduate from college and want to have the same luxuries their parents provided. Guess what? You can't! You have to earn those nice vacations, expensive shoes, and frequent meals out.

Anonymous said...

Actually, it's not that hard to do for a year. I'm in the middle of doing exactly this.

Also, that emergency reserve you mentioned is overrated. If you devote your excess money to paying down all of your highest interest debt first, you can fall back on those credit cards if there IS an emergency. Stashing money away in a savings account when you're incurring 15%-25% interest is stupid. If you delay paying off that credit card you're guaranteed to pay that high interest. If you focus on paying it off up front then you only pay that high interest if there is an emergency for which you need a safety net! Once that monthly payment is gone, you can afford to go out and have that latte. In fact, the first thing I did when I graduated was liquidate my savings accounts that yield about 5% per annum and apply it to my credit card that charges me a 10.24% APR. That cut out 20% of my debt immediately. Later that month I had a blowout and had to get new tires for my car. It cost my $500 that went on that credit card, but I still better off charging it on the card.

I've had to cut back and tighten my belt since graduating this May. What this tells me is that maybe I didn't need to go on my annual ski trips in college. Maybe I didn't need to have a latte and scone every morning on my way to class. Maybe I didn't need all that wine and cheese. And maybe I should have asked my parents for another $8,000 so I would be starting out fresh. It's easy to say after the fact, but after a night of wine and cheese I really needed that latte and scone to get me through 8:00 am Advanced Microeconomic Analysis.

Now, as a financial analyst, I'm seeing people making these mistakes and what it’s costing them. In another 10 months I'll be debt free through some solid discipline and a realistic plan. So, what’s so bad about that?

Lastly, your largest budget item - rent - seems a bit out of line to me. Sure, maybe if you live in Manhattan or the trendiest part of other large cities this would be reasonable. The point is that it's not reasonable for a recent grad to be out there living in a place they can't afford. It may be distasteful to live somewhere other than SoHo, or (in my case) Uptown Dallas... but it's only for a year or so until I manage to retire that debt and get financially stable.