rich nerd, poor nerd

30
Rich nerd, poor nerd Two cents on managing your finances after you graduate Laura A. McLay Virginia Commonwealth University [email protected] http://punkrockOR.wordpress.com

Upload: laura-mclay

Post on 27-May-2015

2.071 views

Category:

Economy & Finance


5 download

DESCRIPTION

This is a presentation on financial planning for college students.

TRANSCRIPT

Page 1: Rich nerd, poor nerd

Rich nerd, poor nerd Two cents on managing your finances

after you graduate

Laura A. McLay Virginia Commonwealth University

[email protected] http://punkrockOR.wordpress.com

Page 2: Rich nerd, poor nerd

My parents celebrate their 40th wedding anniversary next week

(These are their celebrity doppelgangers)

http://www.celebrities-galore.com/celebrities-photos/david-letterman.jpg http://www.triviatribute.com/images4/audreymeadows4.jpg

Page 3: Rich nerd, poor nerd

My parents gave me a lot of advice

• Always say please and thank you.

• Exercise every day.

• Eat your vegetables.

• Eat a green vegetable every day.

• Don’t eat sugary breakfast cereals.

• Lift with your legs, not your back.

Today I’m going to talk about their financial advice

Page 4: Rich nerd, poor nerd

We didn’t have a lot of money when I was growing up…

• We clipped coupons • We ate food from the generic aisle • We took free classes at the park district • We read books at the library rather than buying books • We didn’t belong to a gym, we used the heavily subsidized

workout facilities at parks & recreation • We only went to museums on free days • We only ate out on special occasions • We shopped around for clothes, shoes, etc.

to get bargains (the 21st century version of my mom uses

craigslist, ebay, and Groupon) • Etc.

http://www.flickr.com/photos/sugarpants/4369289730/sizes/m/in/photostream/

Page 5: Rich nerd, poor nerd

…but we were “rich” • My parents were able to buy a nice house • They saved for retirement • We took family vacations • I even graduated from college without loans

Without my parents’ savvy financial habits, none

of this would have been possible!

They could easily have been broke.

Here are their six basic financial rules.

Page 6: Rich nerd, poor nerd

Lesson #1

Live within your means,

even if you are on a graduate student stipend.

Exception: taking out student loans is OK.

Page 7: Rich nerd, poor nerd

Work toward paying for these things in cash

• Appliances

• Furniture

• Bathroom and kitchen remodels

• Used cars

• New cars!

…anything that costs <$2000.

(We’ll come back to that later)

Page 8: Rich nerd, poor nerd

Buy a nice house that your grandmother wouldn’t consider a mansion

http://www.mymoneyblog.com/save-money-on-housing-live-well-in-less-space.html

The tax deduction for the interest that you pay on your mortgage is not much of a benefit. You only receive a discount—not a savings—on your mortgage. And this is only on the part of the mortgage interest that takes you above the standard deduction. The tax deduction does not warrant buying the biggest house you can afford.

Page 9: Rich nerd, poor nerd

Having one expensive habit and some occasional expenses are OK

(as long as you don’t have to take out loans*!)

• Vacations • Kids • Espresso • Shoes? * A loan is anything that you cannot pay off right now, including charges on your

credit card. We’ll come back to that later.

Page 10: Rich nerd, poor nerd

What does the average wedding cost?

• Three major surveys indicate that the average wedding costs $30,000.

• True or false:

The average wedding costs $30,000.

Page 11: Rich nerd, poor nerd

FALSE!!!

Why are wedding costs over-estimated?

1. Kim Kardashian’s $10,000,000 wedding is averaged into this value

The median cost is more appropriate here. The median wedding cost is $15,000.

2. They take a biased sample Only people who register at pricey wedding boutiques

are asked to take these surveys They are much more likely to have expensive weddings People who have courthouse weddings are not included!

Page 12: Rich nerd, poor nerd

Lesson #2

Don’t live paycheck to paycheck: Put enough away for a rainy day

Page 13: Rich nerd, poor nerd

Quick question:

If you were to face a $2,000 unexpected expense in the next month, could you get the funds you need?

(a) certainly able (b) probably able (c) probably not able (d) certainty not able

National Bureau of Economic Research survey from 2009

Page 14: Rich nerd, poor nerd

Nationally, this is how people answered

a) 24.9% b) 25.1% c) 22.2% probably not able d) 27.9% certainly not able So almost exactly half of all respondents would

have trouble meeting an unexpected financial expense!

Takeaway: Most people file for bankruptcy when they face a small ($1500), unexpected expense.

Page 15: Rich nerd, poor nerd

Even the affluent do not save enough

For those making >$150K

c) 4.7%

d) 9.8%

For those making $100-$150K

c) 12.9%

d) 10.8%

Page 16: Rich nerd, poor nerd

How much should you save?

http://www.bls.gov/opub/ils/summary_10_05/long_term_unemployment.htm http://mercatus.org/sites/default/files/Recession%20and%20Long-Term%20Unemploymentsmaller%20NEW.jpg

You should save enough to live for six months with no income. In this current recession, we have seen record numbers of long-term unemployment (more than 6 months of unemployment)

Page 17: Rich nerd, poor nerd

Lesson #2b

Start saving for retirement. Now.

Page 18: Rich nerd, poor nerd

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

20 25 30 35 40 45 50 55 60

Reti

rem

ent S

avin

gs

Age when you start saving for retirement ($5000 net present value in savings per year)

Retirement savings 2% inflation, 3.5% interest

$5000 x 5 = $25,000 makes you $136,000 at retirement

* This ignores dividends and other benefits of starting to save early!

Page 19: Rich nerd, poor nerd

Retirement savings 2% inflation, 5% interest

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000

20 25 30 35 40 45 50 55 60

Reti

rem

ent S

avin

gs

Age when you start saving for retirement ($5000 net present value in savings per year)

$5000 x 5 = $25,000 makes you $270,000 at retirement

* This ignores dividends and other benefits of starting to save early!

Page 20: Rich nerd, poor nerd

How much can you save?

Roth IRAs • $5000 per year, with a potential increase based

on inflation • Available to single filers who earn up to $105K

per year or joint filers who earn up to $169K together

• One benefit is that the tax is not deferred.

401Ks • $16,500 per year, generally tax-deferred

Page 21: Rich nerd, poor nerd

Lesson #3

Pay off your credit cards

in full every single month.

There are no excuses.

Page 22: Rich nerd, poor nerd

What happens if you don’t?

• Say you have $2000 credit card debt on a card with 15.7% interest with a minimum payment of $25. – You will never pay off the

debt!! • If you pay $30 per month

instead, you will end up spending $4553.69 over 28+ years to pay off the debt. – The $2554 in interest alone

can be put in your ROTH IRA.

Page 23: Rich nerd, poor nerd

Lesson #3b

Corollary: Never ever take out a title loan.

Page 24: Rich nerd, poor nerd

Lesson #4

Don’t gamble.

Page 25: Rich nerd, poor nerd

If you’re forced to play the lottery…

http://online.wsj.com/article/SB125366023562432131.html

…pick large numbers!

Page 26: Rich nerd, poor nerd

Lesson #5

Pay off your student loans.

(OK, this one wasn’t from my parents, since their frugal lifestyle led to no student loans for me back when

college was a lot cheaper. This rule is in the spirit of their financial advice for those going to college now)

Page 27: Rich nerd, poor nerd

Why?

From Megan McArdle, MBA:

“Congress has made it very difficult to shed student loan debt. No student loans, not even the private ones, can be discharged in bankruptcy. As a result, all the personal finance experts I've ever listened or talked to say that they're incredibly hard to get rid of… There are only two ways to erase the debt: prove you're permanently disabled and will never again earn more than a pittance; or die.”

http://www.theatlantic.com/business/archive/2011/06/dont-count-on-settling-those-student-loans/240272/

Page 28: Rich nerd, poor nerd

Lesson #6

Marry well.

(i.e., marry a saver!)

Page 29: Rich nerd, poor nerd

If you follow this advice, you’ll lead a frugal life and you might drive a

car like this,

but you’ll be rich.

Page 30: Rich nerd, poor nerd

But then again, what do I know?

Dr. Laura A. McLay [email protected] http://punkrockOR.wordpress.com/ @lamclay on twitter