Almost one year ago, I walked off the stage at Stanford graduation with a diploma in my hands and a dark cloud over my head. Graduation day itself was a sunny day, but my future didn't look as bright as it did uncertain, if not ominous. I was graduating without a job, with no savings and with six-figure debt.
I was not alone. Over one-quarter of my classmates were graduating without a job, determined to find the right opportunity once school ended. The average debt burden of Stanford MBAs is often in the six figures, not so different than at other top-ranked MBA programs. My family was comforted hearing these statistics. My situation - what would be troubling to almost anyone else - was commonplace at Stanford.
When the fun of Commencement weekend ended, reality set in. I had been living in a mansion with a pool and a hot tub, in one of the most expensive zip codes in the country. But with no income, I couldn't pay rent any more. It was time to move out and move into extra bedrooms in friends' and family members' homes. My belongings were strewn across the Bay Area as I moved from place to place, living off the generosity of wonderful people.
Eventually, things got better. I received an offer from a company I had interned at during business school. And with that offer in hand, I was financially able to start paying rent again.
With large monthly debt payments taking roughly a quarter of my after-tax income, I couldn't afford to live even close to the way I had lived before. I ended up finding a home on Craigslist, sharing a bathroom with four roommates and using the converted living room as my bedroom. That's right, not even a proper bedroom. Many of my classmates are similarly living with multiple roommates to make ends meet. To live in San Francisco - one of the most expensive cities in the country, we have to make trade-offs.
The first thing I did when I got my first paycheck was begin building a financial safety net. If I didn't want to stay in the extra bedrooms of generous friends ever again, I knew I'd need a financial buffer in case the unforeseeable happened.
I'm still just one year out of school, and I'm a long way from fully paying off my debt. I've learned a lot over the last year about my feelings toward money. I've also learned some key things anyone should know if they're graduating this spring with debt:
1) Bring home the bacon. Nothing will do more to help you pay down your debt than landing a job with a great salary. Of course, you shouldn't take a job just because it pays well. You should love your work. But if you can't live comfortably on what's left of your salary after you meet your debt obligations, you need to think about looking for employment elsewhere. Also, don't be hesitant to use your debt payments as a powerful negotiating tactic to justify why you need a higher starting salary. I did, and it worked. If you wonder why or how to negotiate that offer, check out some sage wisdom from my Negotiations professor, Margaret Neale.
2) Get organized. Understanding your cash flow is paramount. How much are you earning? How much are you spending? Most importantly, are you earning more than you're spending, and if so, by how much? I think sticking to a budget is hard and outdated. But staying on top of cash flow is pretty easy. With Personal Capital, you can link all of your financial accounts and see your cash flow with some easy-to-use, interactive, beautiful charts.
3) Build your emergency fund. There is debate among personal finance gurus about how much you should save in an emergency fund before you pay down your debt as aggressively as possible. Suze Orman thinks you should have 8-12 months of expenses. Dave Ramsey thinks you need only $1000. For me, the right answer falls in the middle at 3-to-6 months of expenses in liquid assets. With that amount of money at-the-ready, I feel prepared for anything that might come my way. I never want to be in that savings-less, job-less, home-less situation again, and this savings buffer is my protection.
4) Put payments on auto-pilot. Meeting your monthly debt payments on time is critical. If you don't, your credit score will suffer, and you'll rack up late fees. So set up automatic payments to come out of your checking or savings account every month. Whether you have one loan provider or many, setting up auto-payments is best practice. Some loan providers may even reduce your interest rate if you set up auto-pay. I put my loan payments on auto-pay. It's one less thing to worry about.
5) Get lower interest rates. It's worth exploring if you can refinance your debt to lower interest rates on your loans. The Grad PLUS loan, if disbursed before June 2013, had an interest rate of 7.9 percent annually. That is too high! You might save thousands of dollars in interest payments by refinancing. It's worth shopping around. A rising star in this space is Social Finance. They even offer complimentary career coaching if you have a loan with them.
6) Don't let the debt rule your life. I always found inspiring the story of Joe Mihalic, a Harvard MBA who aggressively paid off his $91k student debt in ten months. But his debt repayment schedule is hard to replicate because his lifestyle before getting his finances in gear was absurd. He had two cars, a home with extra bedrooms and a lavish lifestyle. (I can't sell my extra motorcycle to pay off my debt because I was never crazy enough to buy one.) I believe Joe went too far in paying off his debt as quickly as possible. To save money, he missed important weddings and family events, and he can never get those experiences back. It's important to strike a balance -- live frugally but also don't punish yourself. I plan to still take vacations and go to my friends' weddings, but I'll do so on the cheap as much as possible.
Congrats on graduating! You've worked hard, and it's a major achievement. If you're homeless, job-less or penniless, take it from me that it will get better. And once it does, it'll be time to get your finances in order and pay off that debt.
Michael Ruderman is an employee of Personal Capital.
However, Brian McBride, an associate producer at CNN and a 2010 graduate out of Arizona State University, managed to pay off $26,500 in debt in just two years. He explained his plan on CNN Money's website. McBride owed $20,500 in student loan debt and $6,000 for his 2003 Honda Civic. He said he tackled his car loan first to pay down a higher interest rate during a six-month grace period following graduation on his student loans. In his first job out of college as a local reporter in Green Bay, Wisc., he lived frugally while working for $13 an hour. Read more here.
From her story: I started by making a budget for each of my expenses, and then made it a point to look at my bank account and my budgets spreadsheet once a week to categorize all of the money going in and out. I also calculated my monthly expenses, and tried to determine what it would take to put $500 to $1000 extra each month–on top of the $800 in minimum payments I was already making–toward putting a further dent in my loans. Since I couldn’t do it based on how much I was earning, I got creative: - Rent: I gave up my Dupont neighborhood studio and found a roommate in a cheaper neighborhood, which halved my rent. Cable I canceled my subscription, and streamed shows for free on my computer instead. - Gym: Rather than pay $95 a month for health club membership (D.C. gyms are expensive!), I started using the free facility at work, joined a running club on Meetup and streamed free workout videos online during rainy days. - Phone Bill: I limited my data usage and calls, and switched to a plan that cut my monthly bill by $30. I even told friends not to text me! - Entertainment: Instead of relying on happy hours and dinners out, I found free events on Meetup, like hiking trips and book clubs. Or I’d invite friends over for food, and they’d bring their own beer. I also only ate out if it was beneficial to my career, like networking lunches. - Travel: I went to Peru in the winter of 2010, and this year, I’m planning on Malaysia — both countries where the exchange rate is great. I stayed in hostels, and ate where locals do instead of going to pricier tourist spots. Plus, I put a little aside each month, so the expense is built into my budget and doesn’t take away from my savings. (Make travel a Priority Savings Goal in your own budget.) Read the whole thing here.
Kristin Wong paid off $12,000 in a year, despite having only a $10/hour job. In an op-ed for MSN Money, among other things, she said she moved in with her parents and held back from taking a trip or shopping for new clothes.
Sarah Knutson explained how she paid off $30,000 in debt in two years: With her first job, she made $2,000 a month and lived at home. "Each month, I repaid $1500 in debt, leaving $500 of 'fun' money," Knutson explained. She also skipped skiing and snowboarding trips.
Ohio state Rep. Christina Hagan may be an elected lawmaker, but she's waiting tables and working at her family's heating & plumbing business to try to pay off her $80,000 in student debt.
A couple paid off $30,000 in one year by skipping out on having a cell phone at all, and skipped out on having Internet and cable TV packages. "We stuck with dial-up [Internet]," one of them said.
Art Institute of Atlanta graduate Amy Kroezen collectively owed $116,000 with her husband. Neither of them made more than $35,000 a year. They decided they would commit one of their incomes solely to paying off their debt. Among other steps, she took to building her own furniture since they couldn't afford it, constructing a king-size bed, dining table and toy box. She made her own cleaning supplies and grew some of their own food. After four years, they've paid off $103,168 of their student loan debt.
Kent Lister paid off $36,000 in 7 years, saving $2,907 in interest. Tax returns had to go back into his loans, he picked up a weekend job, and then "snowballed" his payments: "When you pay off one loan/recurring payment, add that amount to your next loan. Once that loan is paid off, take those two amounts and put it into your third payment (like a snowball, it just keeps growing). Repeat until all debt is cleared."
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