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.