PETE: Welcome back to How Not to Move Back in With Your Parents. You are on the IU MoneySmarts Radio Network. I’m Pete the Planner. Alex is here as always. Hello, Alex.
PETE: Net worth. Wait, we should set up the show. This show, this podcast, is to help students understand their financial lives a little better so when they graduate, that they have an advantage over the people that did not listen to the podcast cuz you actually know what you’re doing.
ALEX: And believe me, you will have an advantage. [LAUGH]
PETE: I really feel that way. Do you? I’m biased.
PETE: I’m a little biased.
ALEX: Absolutely. I one hundred percent feel that just from, you know, being around you and learning all about finances.
ALEX: Things like that, that I’m a lot better off.
PETE: So this one, this is the very, very secret information that no one knows. I’m being a little dramatic, but if you understand net worth as a college student and right upon graduation, you are heads and shoulders above your competition. First of all, do you view other people as your competition, other students as you graduate not only for internship but jobs, do you feel the competitive nature, am I making more than I should?
ALEX: It definitely depends on what you’re speaking of when it comes to jobs and internships, 100%. You’re always comparing yourself to other people, well he got this job, what about me? He’s doing this outside of school, what am I doing? So it depends, in some areas, no, but in professional areas especially, definitely.
PETE: Here’s a conversation you and I have had off the air many times. A lot of people think that you need a great job to create a good financial life for yourself, and see that is a fallacy. You need to have a good financial life so that you can get whatever job you want. People limit themselves because they force themselves to take jobs they don’t want or to make money the primary focus of a job. Whereas if you take care of your financial life, if you understand things like net worth, which we’re gonna discuss here in just a second, you become better in a competitive sense because those other people that don’t view it that way, they’re just off balance.
ALEX: Yeah, and it’ll help you focus on your work and everything outside as well. You’ll be more balanced if you don’t have those stresses that come along with not knowing or making the wrong decisions.
PETE: You know not a lot of college students, frankly, have the levels of financial stress that working adults do. Now that being said, several college students have financial stress. Those putting themselves through school. The weird thing is student loans are a really weird thing, when it comes to financial stress because when you get a student loan, when you get approved, your goal when going to college is to have college funded in some way, shape, or form. So when you get that student loan approved, or that student loan check in many ways you feel like you’ve accomplished what you were setting out to accomplish, and you do exhale. I mean that is part of the problems of students loans once you exhale it’s kinda hard to care again. But you start to care again when you get that first student loan check. But I think the focus quickly needs to turn to your net worth. And, Alex, this is something you learn about a lot last year. Your net worth, when you come out of college, if you’re the average college student, frankly, it’s gonna be negative. When you hear that, now you know a little bit more than the average college student on this topic. But when I say, Alex, it’s possible that you exit school and your net worth, your assets minus your debts, is gonna be negative $26,000, hypothetically here. What do you think when you hear that?
ALEX: For me, at this point I perfectly understand that. I have accepted the fact that when I come out of college if you look at, cuz I believe net worth, if we want to be technical, assets minus liabilities, correct?
ALEX: So my assets are obviously not very much.
ALEX: Because where you’re spending money constantly and things we’ve discussed over many weeks on this podcast. But those student loans which are usually the big deal are gonna cause a huge liability in your numbers. So I fully expect to be at negative until I get those paid off.
PETE: And so, that’s the thing, right. You graduate with probably zero assets and, you’re gonna graduate with some liabilities and let’s use $26,000 as the number, let’s do that. It is overwhelming to think that when you turn back in your rented, smelly cap and gown, that you’ve got a great education, and the net worth of minus $26,000. Again, we’re just throwing that number out there. Not everyone will be in that position, could be better, could be worse, and so, what do you do with that? It almost feels like negative monopoly money because it’s so much money in relation to the assets you have, which is generally nothing, that it can be overwhelming.
ALEX: Definitely. And I feel like it would be good at that time to take a deep breath, because I know for me it makes me nervous thinking about, all right, I’m getting out of college I have negative $26,000 in debt. What if I have no money to my name at that point, because as a lot of college students do, you can expect to come out with less than $1000 total in your checking account. So, that can be a really scary experience.
PETE: Debt stinks, student loan debt stinks for a couple of reason, but here’s the primary one, it effects your graduation. It’s going to occupy the debts or the payments to substantiate that debt, it’s gonna occupy your income. So your new income, your new job which you’re glad to have, part of it’s gonna go to pay for the past to pay for education that we’re glad you have and you’re glad you have. But the good thing is those payments make your net worth go up and this is where net worth becomes very important. You need to establish your net worth seriously the day you graduate from college. And not from a materialistic standpoint to say, I’m worth more of that, no. It’s simply to set a marker to say, this is my starting point. I’m stepping on the scale today. How much weight do I need to lose? How much debt do I need to pay down? So, say you graduate, you measure your debt. You’re in minus 26,000, here’ is your goal Alex. Your goal is in the next 12 months, how much of that could change? How much is that net worth gonna change? Here is what I know it’s gonna happen. Number one, coming right out of school, if you get a job, you need to be contributing to your company sponsored retirement plan immediately. It’s one of the smartest things you could do. We have an entire podcast, coming up on that here a little bit later in the season. So that’s number one. Investing in your 401K, as it’s often called, is gonna increase your net worth and so that will off set that debt number a little bit. Number two, just establish an emergency fund, like you said. Let’s say you get a thousand bucks in the bank, so if you get a flat tire on the way to work, your job doesn’t end because you can’t get to work. So that $1,000 that’s in savings all of a sudden brings your negative $26,000 of net worth to $25,000, so you’ve seen a $1,000 increase in your net worth. Now here’s my favorite part. This is my favorite part, you know me well. Paying down your debt increases your net worth. Paying down your debt increases your net worth, and this is why I don’t like people to simply make minimum payments on their student loan payments, because if you do earlier on in the student loan process, if you look at what’s called an amortization table, which is a table of how debt is repaid. So as you go to pay your debt, your money splits into two, okay. And early on in the amortization table or early on in the process the majority of the money of your payment goes to pay back the interest on the debt and the remainder goes to pay back the principal or the loan. So if you’re just paying the minimum payments your net worth is not increasing very much at all because the payment is not going to decrease your debt it is actually going to just pay the interest payments. That’s why I want people to focus on paying more earlier in the process because then it brings that net worth number up. Now, Alex, at the end of twelve months of employment your first working job outside of school, I don’t know what a working job is opposed to a non working job but let’s not try to figure that out. Let’s say you went from negative $26,000 to negative $6,000.
ALEX: In one year? Well, I’m feeling pretty good, then.
PETE: Yeah, and I saw the look on your face and of course the podcast listeners didn’t, cause this is radio. But that was a look of, I do not know if that actually seems possible.
ALEX: $20,000 because I guess it might be thinking, for me $20,000 that means you paid off $20,000 of your debt but it could include the other things like the 401k, that is also something to keep in mind.
PETE: Okay, so let us review over some picture here. Let us say, you can’t wrap it here, we’ve only been here for three hours, but let us wrap up with this, if you could get a job out of here your for first pay check is $40,000 a year. I gotta have you save 10% to your 401k right off the top. So that’s gonna save $4,000. Your net worth increase by $4,000 right there. You’re gonna need at least $1,000 or so set off to emergency fund, so now you’re at $5,000. Let’s really work on paying down that student loan debt by $2,000 to $3,000. At that point, you’re at $7,000 or $8,000, and your net worth has shifted from $26,000 to maybe $18,000, $19,000. Now, if your job pays a lot more than 40, or some other circumstance has come around, then by all means, it’s pretty easy to shift your net worth quickly, and that’s the best measure for a college student or a working adult.
ALEX: And it sounds like if you can do all of that to lower that number closer to zero at least, that will help you keep positive because you may have a lot of debt left for the student loan, but if that number goes down to 6,000 the first year you’re like I made a lot of progress. So it will help you feel good and keep up with it.
PETE: It is about momentum. The reality isn’t losing weight or losing debt, you gotta stay interested. You will lose interest if you don’t measure it, you really will. If you say I’m worth negative and I don’t even care, I don’t want to look at it. That’s a problem, because then you won’t feel the momentum that’s naturally built when you pay down your debt. For more information on this, I encourage you to go to moneysmarts.iu.edu, you continue to listen to this podcast. We gotta keep Alex [UNKNOWN] and pay down that student loan debt. We appreciate you as always. Thanks for listening to How Not to Move Back in with Your Parents here on the IU Money Smarts Radio Network.