Friday, February 6, 2015

Financial Planning – Part 2 – Learning how to manage money

In my early years the focus was on saving what earned.  Once going to college the focus changed to learning how to manage what I had.

Undergraduate years

The tuition policy at Michigan State was that once you were going full-time (12 or more credits), the cost was the same.  It didn’t matter if you took 13 credits, 16 credits, or 20 credits.  I took full advantage of this.  After the fall of my freshman year when I had a relatively standard 16 credits, I always took 18 or more and one quarter I had 22 credits.  This overload meant that I could graduate in three years instead of four and my education would then cost 25% less.  But even with this, the cost of education was more than I could make during the summers.  So over those three years I pretty much depleted all that I had saved.

I had a few small scholarships, but by the time my education was complete I had spent all my accumulated savings in my passbook account back in Connecticut, I had cashed in the US Savings Bonds that I held, and I sold the two shares of stock that I had.  I had a few small part-time jobs (shoveling snow, cleaning an apartment for an elderly couple, etc.) that gave me some spending money; everything else went for tuition, room & board. 

The third year I knew that I was going to come up a little short, so I visited a bank in Connecticut that was participating in a federal loan program.  The government paid the interest on the loan while you were in school and you didn’t have to start making payments until a year after you stopped going to school.  If you got your degree, then they would also forgive 10% of the loan.  I borrowed $1000, so that meant that I would have to begin paying back $900 the year after I finished my education (including graduate school).

Graduate school

Several things happened when I started graduate school.  First, I had an assistantship which became my primary source of income.  Being an “employee” also meant that I could pay in-state tuition rates.  That was also the year that MSU switched from a full-time tuition rate to a per-credit rate.  In-state was $13/credit (they were on quarters so you paid that three times per year instead of two); out-of-state was $31/credit.  Secondly, that was the year that I finally stopped being solely a bicycle rider and bought my first car.  I financed it through the MSU Credit Union.  It was a fairly low-end model Dodge Dart that cost me $2626.  But it also meant that I now had car payments as well.

The third, and probably most significant thing, was that with all those changes, I started my first budget.  This was the days before personal computers, and even calculators were expensive, so I simply bought a pad of accounting paper and had one page per budget item.  On each page I had date, description, plus (income), minus (expense), and current balance. 

At the beginning of every month I allocated funds from my main account to each of the budget categories.  Every expense was recorded in the appropriate account.  At the end of the month when I got my bank statement I added up all the balances in each category and compared it to the sum of my checking account, my savings account, and the cash in my wallet (including the loose change in my pocket).  I was pretty detailed about doing so – in the two years I ran this budget I was only off $.06 (a nickel that I found on the sidewalk and forgot to record and another penny that I somehow misplaced).

Naturally there were times when one account was getting overdrawn or another was accumulating too much.  If that happened, I would adjust my monthly allocations appropriately and transfer overages from one account to another if needed.  So this was a learning experience.  I found out what my actual expenses were, and I learned how to budget and control my spending.  If I had the use of a spreadsheet or some computer package such as I have now, it would have been much easier, but doing it manually may have been more educational.

At the end of graduate school I got married, we moved to Connecticut, and I started a job.  So I threw out my budget for a while until my finances started to settle down a little, then started over again using the same principles.

Early Work Years

Like most new college grads, I entered the next phase of my life basically broke.  While my income was significantly larger than before, I now had rent payments, two people to feed, car payments (and two years later a second car payment so that my wife was not stranded at home while I worked), insurance, and I had to begin paying back that college loan (although it was much smaller than most of today’s students).  I had a few early career jobs where I never stayed long enough to qualify for a pension, but my focus, in addition to sticking to my new budget, was to accumulate some savings toward the eventual purchase of a house and the starting of a family.  My wife and I made a conscious decision to delay having children until we had a home to bring them up in.

In 1975, the year I turned 27, we moved from Connecticut to Pennsylvania and I began the long-term job that I was looking forward to.  The following year we went looking for property and began building a house that we were able to move into in 1977.  My wife was now working (adding to our savings), and most of our savings was going toward building the 20% down payment that we would need in 1977.  The banks those days were very conservative and they insisted on a 25-year mortgage that was based on both our incomes, so our commitment was that she would continue to work until my raises would replace her salary, then she would stop working and we would start a family.  That only took another year or so – we had our first child in 1979.

Chief Learning


Budgets and plans are good things!

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