On My Own Two Feet

A Modern Girl's Guide to Personal Finance

Manisha Thakor, Sharon Kedar

• Publisher: Adams Media
• Year: 2013
• eBook ISBN: 9781440571138
• Topic: Personal Development
• Subtopic: Business General

Take control of your financial future!

" On My Own Two Feet is a must read for everyone. This book actually makes personal finance interesting. You will read it cover to cover. Go get a copy, and get copies for the people you care about. Taking care of your money is important, and the earlier you start, the better." --Tim Westergren, Founder, PandoraWhether you've been living paycheck to paycheck or are saving for a down payment on your first home, this updated edition of the bestselling On My Own Two Feet will help you grasp the basic principles of money management. Written by Harvard Business School graduates and leading investment experts Manisha Thakor and Sharon Kedar, this finance guide provides you with all the information you need to know to keep your everyday spending in check, save for big-ticket items or emergencies, and create a secure retirement plan. Thakor and Kedar's time-tested strategies have been featured in the Wall Street Journal, Forbes, The Huffington Post, and are now adapted for your specific needs, such as paying off your student loans or budgeting for your future wedding, so that you'll never be short-changed by credit card companies or banks again.With the valuable advice and concepts highlighted by On My Own Two Feet, you will achieve your life goals--and finally free yourself from financial stress.

CHAPTER 11
Your Student Loans

For years, higher education was considered a one-way ticket to the American Dream. The math of higher education made excellent sense. By investing in education, you would see your earnings grow and your career options blossom. As such, student loan debt has traditionally been considered “good debt.” For the majority of career paths, taking on student loans generated a very positive return on that investment. This could be seen statistically, both in the significantly higher earnings for individuals with college degrees versus high school diplomas, and in the fact that up until around ten years ago, student loan debt struggles were fairly isolated.

Fast forward to today and it is a very different story. According to the Institute for College Access & Success’ Project on Student Debt, two-thirds of the class of 2011 held student loans upon graduation. The average loan outstanding was an eye-popping $26,600. When you compare that to the average starting salary for the class of 2011 of $41,000, you can see this is quite a financial burden to be carrying right out of school. Today, millions of people are struggling with student loans.

That struggle is understandable. Let’s say Sally is earning that average of $41,000 a year and takes home $30,750 after taxes (assuming a 25 percent effective tax rate). Sally is determined to pay off her student loans and is quite disciplined about it. She sets aside 10% of her after-tax salary to pay down her student loans. At that pace, to pay off her $26,600 in student loans, which carry a 7 percent interest rate, it will take her fourteen years to become debt free!

Most students don’t think about the math of student loan payback up front and what that will mean for their standard of living given their chosen career. The goal of this chapter is to try and change that. We want you to think about your loan repayment plan as part of the total equation of applying to schools.

If you are a recent graduate reading this book, you may be nodding your head in an all-too-familiar feeling of understanding. Before we go any further, we want to say that no matter where you are now, you went to school for a good reason: You went to enrich your mind. The knowledge you have gained from school is an asset no one can take away from you. The way you choose to put it to work in the future can bring you great joy. So even though you may be struggling with student loan debt, you know that it wasn’t as if you went on a spending spree at a high-end department store for frivolous items you didn’t need.

That said, times have changed and we need a new way to think about when to pay and how much to pay for education. In this chapter, we help you think about how much is reasonable to borrow for education. If you already have student loans and are struggling with them, we will explain your basic options for loan relief.

Heading Off To School? Consider Our Higher Education Rule of Thumb

Student loans are serious business. Once you borrow that money, you are legally on the hook for that debt. So you want to think long and hard before agreeing to take on any student loans. A rough rule of thumb we find helpful when thinking about how much is “too much” to spend on education is this: Don’t take out more loans than what you think you will make as your average yearly salary over the ten years after school.

That’s a mouthful, so let’s break it down. Say you want to pursue a career in marketing and you think you will earn an average of $50,000 a year for the first ten years that you work in this career. Now say you have been accepted to a really great private college where the average room, board, and tuition total $40,000 a year (adding up to $160,000 for four years). So here’s the question: Would having $160,000 in loans be reasonable if you expect to earn $50,000? Unfortunately, probably not. Why?

Let’s say your interest rate on your student loans is somewhere between 4 percent (the current low end for some government loans as of this writing), and 12 percent-plus (which it can be for private loans). If you set aside 10 percent of your take-home income a year—which is no small dent in your cash flow—it would take anywhere from twelve to more than twenty-five years to pay down that debt. If you apply less than 10 percent of your income to student loan payments it will take even longer to pay off that debt.

Thinking about paying back your student loans in the context of the Power Trio of Budgeting helps explain how something that seems on the surface to be so good (getting an education) can quickly turn into a financial noose by limiting the money you have to spend in other areas. The money has to come from somewhere and that 10 percent takes a big bite out of the Power Trio of Budgeting pie. If your student loan repayments are much more than 10 percent of your take-home pay, it will put undue financial stress on your shoulders. Time and again, we’ve seen this student loan–induced financial anxiety create dread and even regret for having taken on a mountain of student loan debt.

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You may be asking why we are suggesting that you compare your debt to a ten-year average income. The reason is that some career paths have income trajectories that start out very low but can grow to large numbers. If we just compared student loans to the starting salary, we wouldn’t get an accurate picture of just how powerful that education will be over the long run. For instance, a new doctor in residency may make $30,000 a year but make over $200,000-plus ten years out. That’s why we suggest the ten-year average as the way to measure your income.

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Importantly, this is not a hard and fast rule. You may willingly choose to spend more on your education for a specific reason. For example, you may be a gifted musician and get into a top private school for music. The loans you take out may be quite large in relationship to your future earnings. But the joy that you will receive from pursuing that career path is so great you are willing to make the tradeoff of having less to spend in either your foundation or fun categories. The key is that you are making a conscious tradeoff.

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Types of Student Loans

When applying for student loans, there are ...

Table of contents

• Title Page
• Dedication
• Contents
• Foreword to the New Edition
• Introduction
• PART A: The Tools for Financial Empowerment
• PART B: The Path from Saving to Investing
• PART C: The Strategies for Real-Life Situations
• Appendix A: The Tools for Financial Empowerment
• Appendix B: The Path from Saving to Investing
• Appendix C: The Strategies for Real-Life Situations
• Acknowledgments
• About the Authors
• Praise for On My Own Two Feet
• Copyright Page
• Tables