Monday, August 8, 2011

Bad money habits a graduate student should quit: Part 1

Graduate school can break your spirit and your wallet. If the insane workload and outlandish and hurtful comments from faculty do not lead to a few tears dropping on the floor, the long term just-above-poverty-line income will. I'm in the middle of a doctoral degree, in the most expensive city in the Western world. After a lot mistakes and a lot of hard work, I've lowered both consumer and student debt while I've been here. As I look back at the last 15 years of my after-high-school life, I see that I developed many bad money habits. This bad behaviour took its greatest toll during my two graduate degrees - a time when I could see my non-graduate friends buying houses, eating out at restaurants and driving new cars, and I was counting the quarters in my change dish to see if I could do a load of laundry.

Below are some of the mistakes I, and many of my graduate colleagues, made. I want to emphasize that I am not a financial advisor and no investment, insurance or mortgage advice is made below. I am a graduate student who has learned and broken bad money habits the hard way.

Paying everything and everyone but your emergency fund/savings account

You should really work on developing this fund before you enter graduate school, but better to put money aside late, than never at all. When I get paid, pay myself first - I mean within seconds of getting paid. No matter what the amount, I put 10% into a savings account that is difficult for me to access (i.e. a savings account at a different bank than my chequings account). This account does not have an ATM card and takes several days to transfer money. Every little bit of cash counts. When you are pi$$ poor, that 10% might seem like a lot.....but budget around it and see how you do. I may be scraping by the next paycheque, but my reserve is growing. When I do have and emergency, I have a buffer to protect me. As a result, I don't have to use my credit cards for unexpected expenses.

Even if a student gets paid $1000 a month, 10% savings is $1200 a year.

Living alone

Just silly. In the cheapest areas of Manhattan the minimal cost of a studio is approximately $1400. You can find a reasonably sized two bedroom in areas like the Upper East Side or Morningside Heights for around $2100. That's a 21% savings in rent.

Roommates can be irritating, true - but there is the limit time in your adult life when living with a roommate is acceptable and a roommate is great way to save money on overhead. If your roommate is in your program or in graduate school in general, you'll have someone with which to brainstorm ideas. If they are in a different industry entirely, you'll get to meet new people who are not transient graduate students.

Recreational shopping

Simply put - this is a dangerous habit. Find something better to do. If you are trying to reform a bad shopping habit, an easy technique you might try is one I adopted. When I got the uncontrollable urge to buy something, anything I would first pick out items and then ask if the total price was worth the anxiety of purchasing it. Always, I realized that it wasn't. Almost always, I still wanted to shop.

If I still needed to buy something, I would buy one, entirely consumable item that cost less than $2. That would be my consumable item for the week. I usually settled on a votive candle by the Yankee Candle Company. In the beginning, reacreational shopping was a tough habit to break for me. I ended up with a little stockpile of about 10 candles and a really smelly apartment. Eventually, it became easier and easier to ignore the urge. Now I never crave shopping. In fact, I find it distracting and a little tedious.

Buy on credit

Big mistake. Credit should be for absolute emergencies only and even then you should think twice. Never, under any circumstances, buy something with a credit card that you can wear or digest. If you can outgrow it, rip it or eliminate it, it is not worth paying interest on nor is it worth an escalating credit card balance.

Buy on credit when you have cash

I've seen people use credit cards this way. When I first had credit cards I did this as well - I would use the card when I had cash in my account. I would do so rationalizing that it was somehow better to have that cash liquid, and to pay my veggie sandwich and beer + 21% interest rate when I next had money to pay it. Sheer idiocy. Some people rationalize that it is really important to have that $15 in their chequings in case of an emergency. You won't have to worry about that, because if you break habit #1 you will have an emergency fund. Go ahead, buy that sandwich and beer with cash. It's worth it.

Carrying over credit card balances

This is simple. Carrying over credit card balances does three things 1) leads to compounding interest 2) makes it more likely that your debt will grow to an amount that will be difficult for you to pay off with your limited graduate student income 3) damages your credit rating. Be smart. If you use your card, pay it down completely on the 1st of the month.

Rationalizing optional expenses with future money

This is a classic tactic of the over-spender. Olympic over-spenders will rationalize unnecessary purchases or even loans with income they think they will make they get out of graduate school. You don't have that income tax refund, tips from waitressing next week, birthday money or even your next paycheque until it has cleared your account. As anyone can tell you who has graduated since 2007 - you have no idea what the job market will be like when you graduate. There are two reasons to never buy something with the expectation that money will eventually arrive 1) people who do this have a tendency to underestimate their actual expenditures and spend more than the awaited amount 2) there is no guarantee that amount will arrive or arrive on time.

Pay full retail price

If you are the perfect doctoral student, you will be finished your degree in 5 years. If you aren't perfect, you'll be out in 8. Paying full retail price on anything, particularly clothing is just a waste. Buy on sale as much as possible. If you really think you can justify paying full price, buy on sale anyway and put the difference in your savings. Remember - graduate school is short term. Dropping $100 on a dress that you can get for $50 two months from now isn't worth it.

Buying books

Four reasons - 1) you live in a small apartment 2) the New York Public Library has every holding you can think of and more (and many e-books to boot) 3) most fields of study rely on articles published in peer reviewed journals - anything else, you can borrow from the library.
4) average soft cover book costs $15-20. Even if you only buy 2 a year, that's enough for a studio Coned bill or a reasonable contribution to your savings. Save book purchases for when you have a sprawling apartment with a dedicated library.

Any aspiration to live a Carrie Bradshaw lifestyle

This is a killer in NYC. Every year 1000s of women in their 20s flood this city with images of Sex in the City-like events, clothes, and shoes....and every year, those girls end up to their necks in credit card debt. This is hardly the fault of Michael Patrick King, HBO or any of the principals at SATC. While a often a fluffy, cupcake of a show the producers did repeatedly introduce Ms. Bradshaw's entirely consumer good driven money problems -including a rather humbling scene where a very well dressed Carrie explains to a mortgage broker that not only does she not have any investments, she only has $700 in her savings because she just paid off her credit cards......of course, the show does revert back to fantasy when not one but two people cut Ms. Bradshaw a 20K cheque to use as a down payment for her apartment - thus bailing her out of perhaps a decade of overspending, and presumably bypassing all normal procedures of ensuring that a co-op resident has a 10% reserve.

Carrie Bradshaw doesn't exist. The women that genuinely live this lifestyle here were either born, married or scraped their way into the top 10% of incomes in this country. Wake up - a pair of Manolos...or even a pair of discounted designer heels from Century 21 is not worth the 21% interest you are going to pay on them. You are a graduate student - smart enough to not be 35 and recounting to a mortgage broker how you have less than $700 to your name.

So...what do we think? Are there other money habits a graduate student should drop?

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