Race day has arrived and you are near the starting line of the Money Marathon with all the others who will soon start this journey. Now that you know that having common sense is the most important part of the preparation, you are feeling pretty confident.
“I’ve got this,” you tell yourself, “I’ve been building my common sense skills all along.”
“Are you ready for the tips on how to run the race?” I ask.
“Yep. Drop ’em on me, Pops.” you answer.
“OK. Here’s the first one. You see that line of people over there? That’s where you check in to get your race number. It’s time for you to get in the line.”
“That’s the tip?” you ask incredulously.
“Nope. Not yet. When you get to the front of the line they’ll give you a number and ask you to make a choice that will have a major impact on how challenging the Money Marathon will be for you. Take a close look at all the people who’ve reached the front of the line, gotten their numbers and are now waiting for the race to begin. What do you see?”
You look over at the soon-to-be marathoners. At first glance, it just looks like a group of people milling about with the nervous energy you’d expect at the start of a big event, but then you notice something a little odd about some of them…
“Do some of them have boat anchors tied to their waists?” you ask, almost in disbelief.
“Yep.”
“Why?”
“Good question. I don’t know why anyone would want to begin an arduous journey like this with a burden like that, but some do. That’s the choice they make.”
“Are you telling me that the choice I have to make is whether or not I want an anchor tied to my waist for the marathon?”
“Yep. If you choose to take an anchor, they will also ask you if you want a big or small anchor, and then they’ll tell you at what point along the course you can remove it.”
“Why would I choose to take an anchor at all?”
“Another good question. The race organizers who are giving out the numbers can be very influential and they will try to convince you that taking an anchor will show others how strong you are. Who doesn’t want to look strong? Some people who run the race claim they actually have more energy to complete the marathon if they take on the anchor to start, even if it holds them back a bit initially.”
“That doesn’t make a whole lot of sense,” you reply.
“Exactly! Common sense suggests having no anchor will be easiest. There’s your tip. If you must take an anchor, a small one will be easier than a big one. Pretty obvious I’d say. Dang, I’m proud of you for seeing this! Now go get in line, and make your choice…..”
The Big Choice to Begin your Money Marathon
One of the first “big kid” choices you’ll have to make about spending money also happens to be one of the most important. The important choice I’m referring to is selecting the college you’ll attend. More specifically, selecting a college you can afford to attend without having to borrow a boatload of money to do so.
If you can select a college that will also allow you to have zero student loan debt, you’ll get to enter the workforce after college without a “boat anchor” loan payment to weigh down your monthly saving efforts, and this can be a massive advantage in the long run of your money marathon to financial independence.
A Scenario…
Compare 2 recent college grads who are both aiming to save $60,000 as quickly as possible to invest in a buying a house (maybe with a rental unit included…hmmm?), after they cover their living expenses. For the sake of argument, lets say they both enter the workforce at the same annual salary and they have the same monthly expenses, with one exception. Student A has college loans to repay, while Student B managed to finish school with zero college debt:
Student A:
- Salary: $55,000
- Total Annual Expenses: $51,400
- Living Expenses: $46,600 (includes taxes, health insurance, etc)
- Student Loan Expenses: $4,800 ($400 / month repay of loan)
- Total Annual Savings: $3,600 ($300 / month)
Student B:
- Salary: $55,000
- Total Annual Expenses: $46,600
- Living Expenses: $46,600
- Student Loan Expenses: $0 (no college debt)
- Total Annual Savings: $8,400 ($700 / month)
How much more quickly will Student B be able to reach that $60K goal? How about in roughly half the time! That’s right, assuming they both invest the money they save in a stock fund and average 7% return on their investments, Student A will have $60K in 11 years, 1 month. Student B? 5 years, 10 months.
“OK then. This is an easy choice,” you think to yourself, “I’ll just choose a college I can afford without having to take any loans.”
Unfortunately, this is easier said than done. College is expensive. Far more expensive than in the past. Just about everyone who plans to go off to college these days must give serious consideration to how to they’ll pay for it and there are lots of very desirable schools that will be very hard to attend without taking on some level of debt.
A recent CollegeBoard paper outlines what has changed with the costs of college tuition since 1988:
- Average Annual Tuition, Private 4-Year Institution
- 1987-1988: $15,160
- 2017-2018: $34,740 (up 129%!)
- Average Annual Tuition, Public 4-Year Institution
- 1987-1988: $3,190
- 2017-2018: $9,970 (up 213%!)
Yep, you read that correctly. The “list price” of college tuition is about 2 to 3 times more than what it cost when your Pops went to college about 30 years ago. This big increase has led a lot of young adults to make difficult choices about borrowing large amounts of money to attend their college of choice in far greater numbers than had to in the past. They simply believe they cannot afford to pay for college without borrowing money.
In 2012, 71 percent of graduates from four-year colleges carried debt, with students at public schools owing an average of $25,550 and those with degrees from private colleges owing an average of $32,300 according to Student Loan Hero.
For reference, if you had to pay off these debt levels over 10 years after you graduate (a typical term of repayment for student loans) it would cost you between $300 and $400 every month, depending on the interest rate at which you borrow the money. This is just for the average debt, and there are lots of students who choose to borrow much more than the average. Student loans exceeding $100,000 are not unheard of, and that means loan payments above $1,200 monthly!
All these stats might have just killed your mojo. You may be wondering if its at all possible to attend college without taking on a large student debt commitment, but you can calm down. While 71% of 2012 graduates had some form of student debt, that left the other 29% with no debt when they graduated. You just want to make sure you are part of that 29%. It is possible!
Regardless of how much money you and your family have set aside to pay for college, you can almost certainly find a strategy that will allow you to graduate debt free (or nearly so). The key is to understand your options, discuss them thoroughly with Mom n’ Dad and to have a plan to use the options available to you.
In the next post, we’ll dig into the steps to take to make the vision of a debt free college graduation a reality…
The Money Marathon 