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Financial Advice For Graduates

Stepping onto stage to pick up your diploma is a surreal experience. Looking out at a sea of familiar and smiling faces, you know this is your moment. Once the pomp and circumstance passes, you almost wonder if your banker was among those who were clapping and whistling. Make no mistake: His moment is coming.

Actually, your banker will have several moments – once a month when you start paying off graduate school. If you attended a top tier school, that number runs from $90K-$120K, with a monthly loan payment of $1000 (or more). In itself, that isn’t a terrible drag. But combine it with a mortgage and car payments, living expenses, and loans and it can control your life. According to Tim Calkins, a clinical professor of marketing at Northwestern’s Kellogg School of Management, personal debt has the opposite effect of what is taught at business school.

“Corporate finance executives will often observe that debt is a positive. If you borrow money to invest in productive assets, you will usually increase your firm’s profits and stock price. Indeed, a company with no debt is rarely optimizing returns for stock holders. But people are not companies. For individuals, debt is a burden. When you carry debt, you are paying interest month after month. This is bad for morale as well as your savings.”

Alas, 66 percent of Kellogg’s Class of 2013 carried an average debt of $91,834, up 3.5 percent from the previous year. To help his students, Calkins dons a new hat, seemingly straight from Charles Schwab, and offers this advice.

First, he counsels them to exercise common sense. “It all starts with spending discipline. You have to spend less than you make.  So drive a cheap car and keep it forever. Buy a relatively inexpensive house. Go easy on fancy restaurants and fine wines. Visit Michigan instead of Tahiti. It isn’t really all that complicated.”

Great advice, no doubt, but it misses a key point (one that is drilled into every Kellogg student from day one): Graduates need to track those savings. Otherwise, such acts have little meaning. In fact, a wise move would be to plow those savings back into the school loan. Otherwise, such sacrifices never produce a true reward.

Second, Calkins advises students to make their debt payments manageable. Calling debt “a useful bridge,” he advocates paying ahead (to a point). “Paying down debt is a completely risk-free move that often provides a relatively good return. Remember, the people who loaned you money thought that it was a good financial investment, despite the risk that you would default. You can get the same return with zero risk. That is a good proposition.”

Third, he advocates investing in stocks. Not surprising, but he counsels something that is often in short supply…patience. “I bought one of my first stocks back in 1995,” Calkins shares. “I purchased 100 shares in State Street Bank for $3,357. I still own them and the position is now worth over $31,000. In the past twenty years, I haven’t paid a fee or any capital gains tax on this money. I plan to hold the stock for the rest of my life, so I’ll never have to.”

Aside from pushing a long-term strategy, he adds that stocks are less risky than many think. “If you buy thirty stocks completely at random, your return should be somewhat similar to the stock market as a whole. You might miss Apple, but you might also miss Enron. Some stocks will go up; some will go down. You can sell the losers and take the capital gains loss against your income. In other words, the government covers a portion of the downside.”

Finally, he urges graduates to follow the KISS formula (i.e. “Keep it simple, stupid.”). “Investing can be very complex. The financial world thrives on creating complicated products designed to exploit small mispricing opportunities. My advice: avoid complexity. Instead, you should keep your investments as simple as possible. Work with just a few investment companies and limit your credit cards. Most important, avoid investments that you don’t understand, especially if they seem too good to be true.”

What are some of your thoughts on how to reduce student loan debt once you’ve graduated?

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Source: Northwestern University (Kellogg)