FINANCIAL BASICS
A
Money Management Guide for Students
by
Susan Knox
Smashwords Edition
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Published on Smashwords by:
THE OHIO STATE UNIVERSITY
PRESS
Columbus
Financial Basics
A Money Management Guide for Students
Copyright
2004 by Susan U. Knox
Cover design by Dan O’Dair
All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise) without the prior written permission of both the copyright owner and the above publisher of this book.
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“Susan Knox’s Financial Basics is essential reading for any student attending college. Along with a good hug, parents should give this book to their sons or daughters when they begin college. It does not matter whether it is a residential experience or they are living at home and commuting. Every college student will benefit. In addition to providing practical and valuable advice, presented in a very readable format, Financial Basics is a seatbelt against financial problems.”
—Myles Brand
President, NCAA,
former President Indiana
University
and University of Oregon
“Students have a great deal to manage in their lives away from home—from their coursework, to relationships to personal decisions, one of which is how to manage their finances. This book provides credible examples to head off problems and engages both students and their families in pre-emptive planning not only for college but also for life. A must for parents and students.”
—Karen A. Holbrook,
President, The Ohio State University
“Financial Basics: A Money-Management Guide for Students by Susan Knox is an engaging and insightful primer aimed to help young people learn to manage their finances. This book will give practical advice to help the reader avoid many of the common problems encountered by young people who, for the first time in their lives, are responsible for managing their income and expenses. Financial education is sorely missing in our culture. Many parents have poor money management skills. I think that Financial Basics should be a standard part o f a college’s new student orientation program. Financial difficulties is a significant cause of students dropping out of college. Susan Knox’s book will help colleges retain students by providing the basic tools needed to effectively manage one’s finances.”
—Jim White
Director, Student Financial Services,
Seattle
University
“Financial Basics is a must-read for every college-bound student who wishes to avoid the disastrous pitfalls that have claimed so many. By sharing the stories of real students, Susan Knox has gone well beyond describing 9nancia/ hazards. She has arrived at real solutions.”
—K.J. (Gus) Kravas, Ph.D.,
Vice Provost for Student
Relations,
University of Washington
“This book is a must-have for all incoming freshmen or for anyone who wants to finally learn the true basics of personal finance. By sharing her story and stories of others, Susan Knox has made the journey in successful money management real and understandable.”
—Anne H. Chasser,
Commissioner,
United States Patent and
Trademark Office
“Financial Basics has the potential to make an enormous difference in the lives of college students. Research shows that financial problems present some of the biggest obstacles students face in achieving academic success, or even being able to stay in school. Ms. Knox has written a very helpful and accessible guide; it should be required reading for everyone heading off to college. Or for that matter, for anyone who’s finding that money problems are tripping them up in their efforts to live effective lives.”
—Martha Garland,
Dean of Academic Affairs,
The Ohio State
University
“Susan has put in this book both the practical and the emotional elements related to credit card debt. Her style and incredible insight give an immediate ‘This is me and why didn’t someone tell me this before?’ reaction from her readers. We intend to use Susan’s book as part of our counselor training.”
—Cuba Craig
President and CEO
American Financial Solutions
“Whoever said a CPA can’t write for a general audience, especially a young one? They’re wrong. Susan Knox has hit a home run. The personal stories draw the reader in, we can relate to every mistake we, our kids, our students or friends ever made. Each chapter and paragraph is relevant and important. I especially like the way Chapter 13 ties it all together. Doing what Knox suggests can be a life-changing event.”
—David A. Lieberman
Senior Vice President for Business &
Finance
University of Miami
“After graduating from college I watched my credit card debt grow each month as learned to deal with a new set of responsibilities. I felt out of control, with no idea how to manage money. I read many books on the subject. Susan Knox’s guide is the only one that really made sense to me. The stories are engaging. The tips are easy to understand and achievable. Her book gave me the tools I needed to feel powerful about my finances. Now, two years later I am debt free and building a solid future thanks to Financial Basics.”
—Julie Stonefelt,
The Evergreen State College
Class of 2001
“The summer before my senior year at Ohio State, Susan Knox asked me to review her manuscript on Financial Planning for College Students. The book contained so much valuable information, in addition to helpful hints, money management, credit and saving strategies ... it was exactly what I needed to learn about being a smart personal financial manager. My only regret was that Ι didn’t have all this important information when I started college! I would have made much better financial decisions during my four years at Ohio State.”
—Katie Chasser Coakley,
The Ohio State University,
Class of
2003
* * * * *
In memory of Alan
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Contents
Don’t let easy access to credit cards lead to expensive debt as you pay twice as much for your purchases.
How to get a handle on your financial needs by creating a realistic spending plan and begin to understand your financial nature and personal spending pattern.
Learn to think in creative ways to fund your college education and seek out experienced help.
Basic money-management facts of life that no one ever tells you.
The pitfalls of trying to keep up with others who have more money and how ignoring the rules for debt and student loans can change your life.
6 How Much Did You Say I Owed?
Ways to determine how much you can safely afford to borrow for your education, being smart about choosing your loan package, and the consequences of dropping out of school.
7 But Don’t I Need to Build a Credit History?
Basic facts on building credit history and how to ensure that you leave college with a good credit rating.
How to make decisions on acquiring those extra things you want to buy for college.
9 I’ll Think About It Tomorrow
The dangers of ignoring financial responsibility and how to cope with the habit of procrastination.
What to save, how to store documents, and security issues for your sensitive financial information.
Financial planning for life after school.
12 Develop a Personal Philosophy of Money
Begin to develop your personal philosophy of money.
Write about your money management experiences as a way to pinpoint your strengths and weaknesses around money.
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THANKS TO ALL the students and administrators who freely gave their time and personal information for this project. Special thanks to Natala Hart and Carla Mattmiller, The Ohio State University; Jim White, Seattle University; David Lieberman and his staff, University of Miami; Bob Baker, Eric Godfrey, Gene Magallanes, Sandie Roskoe, and Ruth Johnston and her staff, University of Washington; Jaime Coulson, University of Colorado; Janet Gibbs and her staff, Loyola University; Amy Kweskin, Washington University; Paola Di Domenico, Northwestern University; Janet Abraham, formerly at Whittier College; and my sister, Nancy Dominick, Wittenburg University.
I thank The Ohio State University Press: Heather Lee Miller, Malcolm Litchfield, Eugene O’Connor, and Laurie Avery for their support and assistance in making Financial Basics a reality.
My heartfelt gratitude to Priscilla Long, Nick O’Connell, Phyllis Hatfield, Suzanne Murray, Brenda Peterson, my classmates in Brenda’s class, Laurel Richardson, Alice Acheson, and especially Geri Gale, who instructed and nurtured me in creating this book.
Dr. Martha Garland, Vice Provost for Undergraduate Education at The Ohio State University, helped launch the final stages of the project. Readers Julie Stonefelt, Anne and Katie Chasser, Gay Hadley, Joann Bromberg, Susan Little, and Leigh Calvez gave me encouragement and good advice. My brother Tom Unkefer gave me new ways to think about the book. Janette Baugh provided a peaceful room for writing the manuscript. Joan Graham introduced me to a group of writers who sharpened my thinking. My agent Anne DePue and my attorney Sheila Clark served as superb advocates and representatives.
Finally, a big thank you to my husband, Weldon Ihrig, who supported this idea from the beginning and never doubted the outcome.
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EVEN THOUGH I am a Certified Public Accountant, financial planner, and a former university administrator, when I sent my son Alan off to college I gave him very little instruction about how to manage his money. I told him I would pay his tuition, and we negotiated a monthly allowance. It was his job to handle all the other expenses beyond tuition with the check I sent and the money he saved on his own. I thought it would be a good exercise for my son to manage a monthly stipend, but that was the extent of my training for him.
It didn’t occur to me to tell him what to look for when he chose a bank, how to write a check, why he should balance his checking account, let alone show him how to prepare a budget for living expenses, explain how to make decisions on nonessential purchases like a car, or describe the need for renter’s and health insurance.
I was sent to college with no financial instructions and I did all right. I thought my son would get along just fine, and he did—for a while. He did not have access to credit cards while he was a student. He did not have a personal computer, cell phone, or pager—expensive accoutrements considered necessary by most college students today. Even so, by the time Alan turned thirty, he declared bankruptcy because of overwhelming credit card debt. I was heartsick knowing I might have prevented his financial crisis by giving him a better foundation in money management while he was in high school and college. This book shows you how to avoid Alan’s mistakes and learn to manage your finances.
Shortly after I moved to Seattle in 1996, I began consulting with a private student loan association. As I worked with the staff, they told me how worried they were that students with little experience in personal finance were able to borrow large amounts of money. They wanted to talk with a financial planner about the money management tools students need when they start their college careers. I learned that colleges and universities were also concerned about their students’ money-handling issues—some were even hiring financial planners to help students.
The stories of students’ problems reminded me of some of my middle-aged clients who still did not understand money basics and were struggling with their finances. They knew they needed to get on firmer financial ground, but it was hard for them. I found that many clients never learned basic skills about handling money: how to create a realistic spending plan, how to control credit card spending, how to determine a safe level of debt, and how to save. I even had clients who could not balance their checking account and never knew how much money they had in the bank. When they started bouncing checks, they simply opened another account and started fresh.
You are being asked to shoulder more financial responsibility than students in previous generations. There is no grace period for you; from the first day on campus, you are bombarded with major financial responsibilities, and the ways you decide to manage your money in college will probably be your money management pattern for the rest of your life. That is why it is so important to get firmly grounded in financial basics.
I thought if I could provide fundamental information about money management—information that does not appear in the multitude of financial-planning books on the market—then you would have a greater opportunity to begin your working life in a solid financial position.
In the following chapters, I tell stories of students who had lessons to learn about money when they went to college and the financial knowledge they wish they had mastered before leaving home.
These stories have been compiled from interviews I conducted with college students, recent college graduates, and college and university administrators around the United States. Many openly shared financial lessons they learned. I consolidated their most critical issues and distilled them into stories that I think you will find useful. After each story, I detail the information gleaned from the stories and suggest practical ways to begin setting up and maintaining a financial life.
My aim in writing this book is to help you operate from a position of self-knowledge and control, to reduce the unknown and anxiety-provoking aspects of money management, and to provide a solid financial basis on which to build the rest of your life in a secure and fulfilling way. My wish for you is that this knowledge will put you on the path to making smart financial decisions and to becoming the master of your financial life.
* * * * *
“WE CAN LOAN you enough money to get out of debt,” a sign on a bank proclaims Sometimes credit cards are viewed that way. Students look at easy access to credit as extra money, not a debt that will have to be repaid. When I asked Jason to tell me what he wished he had known about money when he went to college he said, “No question about that. In two words, credit cards.”
JASON’S STORY
I was seduced by credit cards. I couldn’t quit using them. I kept collecting more and more to feed my addiction. I charged meals, magazines, movies, and mochas. I got into heavy debt. I didn’t know what was happening. I woke up and found I owed close to $4,000. And worst of all, I had nothing to show for all that debt.
I remember when I got my first credit card. I was still in high school and I felt as though I’d arrived—I was finally an adult because I had a credit card. I took a lot of pride in being able to charge things, you know, at the mall, buying movie tickets, and at the music store. I enjoyed taking people out to eat and paying for them all. Before I got the credit card, my friends and I always paid for our own food. After I got the card, I was the big shot and I loved picking up the tab.
I had a job and always paid the monthly minimum amount on the credit card statement. I thought that was the correct way to handle my payments. Now I know the minimum amount was based on a ten-year repayment period and a hefty interest charge was added to my account every month I didn’t pay off the balance. Imagine! I would be paying for those mochas long after I graduated from college.
I signed up for every credit card offer that arrived in the mail. By the time I went to the university, I had five credit cards in my wallet. I felt rich. I wasn’t worried about having so many cards. After all, these companies asked me to take their cards, so I thought it was okay. I believed it would be good to establish a credit rating by having credit card debt. I figured the more I had, the better I looked.
I charged just about everything on my cards—from breakfast to concert tickets. I even charged my groceries. Then there were all the things I enjoyed—especially music. My CD collection grew and grew. And so did the balances on my credit cards.
Near the end of my first year of college I started maxing out on most of my cards. It startled me. How could I have spent that much money? I didn’t have much to show for it. I was still paying the minimum monthly payment on each card, but I couldn’t charge any more. I considered getting another card so that I could keep spending. I felt like I was in this debt trap I didn’t know how to get out of I was scared I would add more debt if I got another credit card, and at the same time I wasn’t sure if I could stop spending.
I thought about talking to my parents, but I was afraid they’d be mad, and to be honest, I was embarrassed. Here I was, finance major headed for Wall Street and I couldn’t control my own spending.
Then I got lucky. One afternoon at the student union, I ran into a guy from my dorm. Gabe came to college after doing a stint in the navy, so he was a little older than most of my friends and had more experience. We got to talking and I blurted out that I was worried about my credit cards.
Gabe said that he viewed credit cards as a convenience and a backstop for emergencies, but he never used them to finance day-to-day expenses. He said they were way too expensive for that. He illustrated his point by showing me a simplified example about how interest compounds.
If I bought a $20 pizza and financed it through my credit card at 20 percent interest, at the end of the first year that pizza would be $24 (20% of $20 or $4 interest plus $20). At the end of the second year, the cost would be $28.80 (20% of $24 or $4.80 interest plus $24). I saw that I was paying interest not only on the pizza but also on the previously charged interest. Making the monthly minimum payment would only put a small dent in the debt. But the credit card companies don’t figure interest once a year, they add it every month or even daily so the debt is growing even faster than Gabe’s simple example demonstrated.
This information blew me away. I could easily see how I might not ever get out of debt. It was scary and I had to make changes. Gabe suggested I make a list of all my credit cards, the amount I owed, the minimum monthly payment, the interest rate, and the annual fee. I didn’t even know I was paying an annual fee on a credit card. It turned out I was paying a fee for the two cards I had—a fee for the opportunity to build up debt!
Gabe told me not to use the credit cards anymore—to cut them up and go on a strictly cash basis. He said I could always use a bank debit card in situations where I ordinarily use a credit card. The beauty of a debit card is that it has the convenience of a credit card and the amount I spend is automatically deducted from my checking account.
We looked at the list of what I owed. Gabe told me I needed to start paying down the balances. He said to pay as much as I could each month to the credit card charging the highest interest rate, while continuing to pay the minimum amount on the other cards.
I rethought about talking with my parents. Gabe said his parents had helped him with a financial problem when he first set out on his own, and he encouraged me to ask for my parents’ advice. I was going home in a few weeks. I decided to swallow my pride and talk with Dad.
My dad was working on his income taxes when I got home. He said he needed a break and asked me to go for a walk with him. It seemed like a good time to tell him about my credit card problems.
The numbers, both the amount I owed and the number of credit cards I had, shocked him. In fact, he told me he didn’t realize that a college student could get credit cards. He wasn’t able to get a credit card until he’d graduated from college and had a full-time job.
Dad was really happy I was paying my bills on time. He said I was building a credit history and when you’re first starting out, it’s a good idea to establish a credit rating by having a little debt to demonstrate that you will be responsible for paying it off. But in my case, it was more important to conquer my credit card spending than to worry about a credit rating.
Even dad had to be careful about using his credit cards. He said it’s so easy to use them and not think through the purchase. He told me he had to find ways to protect himself from getting into credit card debt. Now he only had two cards—one for business travel and one for emergencies—and he only used them for those purposes.
I was so relieved after my dad told me about his difficulties with credit cards. Then I told him about Gabe and our conversations about money. Dad looked impressed, especially when I told him how I had quit using my credit cards. I asked him to help me figure out my options for getting my debt paid off.
We brainstormed and made a list of options:
• Leave school for one term to make enough money to pay off the cards.
• Reduce my spending on extras like eating out, CDs, and expensive entertainment.