First-Job Fiascos – Part 2
Posted by Gail | Filed under Money Management
Whether you make more or less, you’ll make a huge mistake if you try to live like your friends who make more than you do. And if those friends are still living at home and paying next to nothing for their upkeep, you’ll have a tough time keeping up with the concerts, fast cars and dinners. Fall prey to the Keeping-Up-with-Friends Fiasco and you could dig yourself a serious hole, particularly if you try to do it using your credit.
You don’t have to shun your old friends. Simply choose one or two times you can join them and skip the rest of the outings. Or suggest some less expensive options you can all enjoy together. Don’t get caught up in a flashy lifestyle that has you scrambling for rent money come the end of the month. And don’t get caught in the trap of thinking your life is any less worthwhile simply because you don’t have gobs of money to throw at your own self-indulgences. You’re a grown-up now and it’s time to put away childish things like instant gratificant and me-see-me-want-me-get.
One of the biggest struggles for the newly independent is the sense that their lives were so much better when they lived at home where they had the full run of a very nicely appointed home. If your parents made your life something from a bad reality TV show, the cold shower of independence may leave you a little nostalgic for what you had. You may even feel you’re entitled to the same big-screen TV and upper-middle-class diet to which you grew accustomed. Hey, if you don’t have the means to pay for that lifestyle, you are not entitled to it… yet. You’ll get there. It’ll take some time and some concerted effort. But you have the power to make the life you want.
Don’t fall into the trap of thinking you can have it all right now because you have credit available. If you think that you can take on loads of debt now and then tackle the repayment later when you’re making more money, you’re setting yourself up for a big fall. A big part of growing up is recognizing that you’ll likely never have enough money to do everything you want to do at once. You must prioritize. And you must be patient. And if you have debt commitments like a student loan or a car loan, you must work hard to pay off that debt as fast as you can before you take on another penny in debt.
The Pay-It-Later Fiasco is rampant among the newly independent with student loans who choose to pay the least amount possible on their debt so they have more money available to par-tay. The longer you take to pay off your debts, the more you’ll pay in interest. And that outstanding debt could prevent you from getting approved for something really important, like as a mortgage, later on.
Speaking of taking on a mortgage. Please, please don’t think that just because you now have a steady paycheque you’re ready to take on home-ownership. If you’re convinced you must get into a home of your own immediately, calculate all the costs associated, like your mortgage, insurance, utilities, taxes and the like. Don’t forget home maintenance, which you should calculate at between 3% (for newer homes) and 5% (for older homes) of the cost of the home or the insurance value, whichever is less. Then start living on your income as if you were already paying those costs. So if your total “home ownership” monthly costs are $1,567, and your current rent is $1,200, you would take the difference of $367 and put it in a savings account. Now you’re practicing living on the smaller disposable income you’ll have and you’re saving money for your downpayment and closing costs too. Hey, if you’re planning to move to another part of town so your home will be less expensive, don’t forget to calculate in your commuting costs when you’re figuring out your smaller disposable income.
If you can happily live on less and you have the downpayment to get you into a home, go for it. But if you find you’re struggling to make ends meet, wait until you’ve got more to put down on a home or your income goes up to a more comfortable level before you jump into the market. Contrary to popular opinion, renting is not “throwing money away.” It’s paying for a place to live. Besides, for the first 5 years of your mortgage, 95% of your payment will be going to interest costs… since you’re “renting” someone else’s money.
Becoming independent and earning your first “real” pay cheque is exciting. Learning to manage your money sensibly is an important part of being independent. Keep the most important money lessons front and centre in your mind:
- don’t spend more money than you make
- save something
- pay off your debt
- mitigate your risks.
There now. You’re off to a great start!
July 22, 2010 at 8:45 am
Thanks for this one – I read yesterdays and was feeling pretty arrogant (just graduated from my masters with a lot of debt but a really kick-ass job with great pay – YES!) and thanks to reading your blog I had a budget all ready to go that sees me comfortably putting about 45% of my income to debt, AND keeping a bit for savings. And I’ve stuck with it, so I’m thinking that I’m amazing at this debt repayment thing.
However, reading this post was a good reminder that I DO have a weakness that could totatlly undermine the strategy I have in place to tackle that debt. I really struggle with my desire to live like my friends (especially like my friends who have wealthy partners who pay for their gorgeous apartments and trips around the world – my partner’s broke like me). I see their apartments and I feel inadequate in mine. I hear about their awesome trips and feel very jealous. If I’m honest, there were several non-scholarly purchases made with my student LOC that were motivated by those feelings. So far I’ve been able to deal with those feelings without crippling debt, but I could easily become that person… so as always, thanks for the timely reminder! My parents put in MANY years of hard living to live how they do now… so I can do the same
Thank God I’ve got a partner to remind me that we need to live like the people we are!
July 22, 2010 at 9:19 am
Ah, yes. My $30k of student loans in the 90’s-a wee bit went for school and rent, but God, I had the best hair and clothes EVER! Fast forward 15 years…eek. Still have that monkey on my back. Trying everything to pay it off. Great post, Gail. I have been drilling this into my child, and he is aware that when he is in university, yes, he will need to get a job, no, he won’t be living the high life, yes, it will all be worth it.
July 22, 2010 at 9:23 am
I think all of these are great tips. I can relate to Jesse’s comments about comparing yourself to friends. Many of my friends can afford amazing vacations around the world, they own their own homes and have a lot of nice stuff. Me, I can’t afford any of that. But the reality is that choosing to live within your means can give you a great sense of pride. And that’s what I’m hoping that the young people who are reading Gail’s blog will realize – that it might feel like deprivation at first to say, “I can’t afford it,” but over time you’ll realize that you are living like a responsible adult and taking care of yourself, and that provides feelings of self satisfaction and true independence – priceless!
July 22, 2010 at 9:36 am
I rented an apartment for quite a while, putting aside as much as I could in my house fund. This worked for me at the time because I was able to travel and not worry about an unoccupied house while I was out of the country. I didn’t consider paying rent as throwing money away. I managed to save enough to put 30,000 down and still have enough to buy furnishings, and friends with houses didn’t mind squeezing into my little apartment.
A friend charged her daughter rent and utilities as soon as she got a “real job”, which reduced the money available for shopping and partying. Her daughter learned to spend carefully. When she moved out the money she had paid was waiting for her in a savings account. I thought this was a good lesson in how to recognize the cost of living.
July 22, 2010 at 10:02 am
Great advise Gail! We have defn. taken a slower route when it comes to furnishing our rental (home) with the things we love – and saving up the money to buy things in cash.
We’re saving to buy a house now – and so looking forward to it. I rent somwhere were we’re responsible for all utitiles/bills and yard maintainance. So we’re used to a lot of the things that some folks get shocked by.
July 22, 2010 at 10:02 am
What a great idea Linda. I think I may put that into practice when my daughter gets there. She is only 8 but we do ask her to put $2.00 a week from her allowance into a long term savings account. I figure the remaining $5.00 a week is enough that she can buy her own gum and what not. If a toy is more than the $5.00 she has a week then I guess she has to decide if the toy is worth saving for a nother week or too or if the gum is rerally that important.
July 22, 2010 at 10:44 am
I have always said that I am from “the generation of instant gratification” (I also like to think I coined the phrase!;) ) Since starting on the road to being financially free, I have struggled with the ’see, want, buy’ part of things. I love stuff! I admit it, though many people on who reply to the blog seem to be stuff free… I love electronics and books and wine and food and shoes etc. I don’t struggle every day anymore but there are still times that I wish I could say yes when the co-workers ask if I want to order lunch with them… there are still times when my first reaction to the ipad is *covet* I am envious when I go to others’ homes and see the big screen tv… I think it has just been part of me for so long that, like weight, it won’t disappear overnight. That being said, I am 5 months from financial freedom. I pay down, minimum, $575/week on debt repayment and more when we have extra/bonus $. It will come… it will come…
July 22, 2010 at 11:01 am
Great post, Gail, and great comments too. I want to add my two cents on the importance of not rushing into home ownership without a solid financial foundation. If someone goes into home ownership because “renting is just throwing money away…” but doesn’t have any wiggle room in the budget and then gets hit with a major expenditure or job loss or catastrophic illness…. Very scary. In the Vancouver area, land of the leaky condo, there’s an obsession with “getting into the market” before the prices spike again. But major projects like envelope repairs can cost anywhere from $30 to $100K, and how many people in our consumer-debt-at-record-levels society have that much money available “just in case?” I remember how shocked I was to read Gail say that homeowners should be saving 3% of the value of the home against maintenance costs. So while we may think “home owner = responsible adult,” the more responsible-adult thing to do is live within our means and save for it!
July 22, 2010 at 11:03 am
I have always lived on half my income> It’s not always easy,but you sure learn to prioritize quickly. Everyone says I should buy a house,but i prefer to have 3 years of emergency money. I never want my job to be an albatross around my neck as my parents did.
July 22, 2010 at 11:42 am
For my son, who will receive an allowance (I never did but my wife did) I will expect him to split it 15% to savings and 15% to giving and 70% to spending.
Really good message about how renting is not a waste of money, gail. Home ownership can ruin young people. I bought my loft at 26, granted, but it was 150K which in Toronto in 2002 was about half the going rate for a more desireable location. But it meant I could afford it, after renting the previous 8 years. It’s a terrible message parents give when they say renting isa waste of money, it’s so not. It’s an education into indepedenent living. Plus you never knwo when you’re young, it’s nice to have options to move to Vancouver tommorow for a dream job.
July 22, 2010 at 11:47 am
financiallyfreeinbc:
We are not all stuff free. Some who have contributed to this blog for a long time learned the self-control part of purchases. We are not always perfect. I want more books (so more book shelves, so more space to put the book shelves…). I want more electronic gadgets and the new ssoftware to go with it. I really wish the money were there but I made the choice between financial security and which fun stuff I can get. I have to avoid going to stores and looking at sales to stay within the budget.
My biggest problem is being in a carrer where understanding and use of the electronic stuff is important while I can try to do without if the money comes from my own pocket. This mismatch is a big problem for me.
July 22, 2010 at 11:50 am
Gail great advice. Thanks
July 22, 2010 at 12:10 pm
@FF in BC Totally “see want buy” problem — and covet the ipad? yup. yup. yup. I have no use for it other than being able to see the scrabble or monopoly board better than my ipod.
July 22, 2010 at 12:23 pm
“You’re a grown-up now and it’s time to put away childish things like instant gratificant and me-see-me-want-me-get.”
This is an awfully depressing way to phrase it. The way I see it, those “childish things” are like Freud’s concept of the id. As children, our id side says we want something, and we depend on our parents’ egos to decide if what we want is realistic and beneficial. As adults, we use our own ego to decide if it’s the right time to satisfy our ids. To never give into those impulses is as imbalanced as always giving in. We just need to satisfy our wants in ways we can afford that don’t damage our long-term financial health.
July 22, 2010 at 1:27 pm
Hi Gail
Great post, and I would like to add it’s NEVER too late to start an emergency fund. I’m over 50 and just started one. Yes, I have stocks, RRSP’s and a big chunk of equity in my home, but I got scared witless when I looked at my debt last year…. I am working hard on paying it down, even going back to working at my own business a few nights a week to accomplish this. I plan on being debt free and on my own (read: out of Corporate Canada) by next summer…. plan, say it out loud, and act! It’s working….
July 22, 2010 at 2:16 pm
I made many of the mistakes you describe in this series Gail, I’m glad I’ve found debt freedom why I’m still young.
thanks for everything
Jason
July 22, 2010 at 3:57 pm
And from the other side of the coin….
Hubby and I paid for his university and teacher’s college. So, I have my PhT (putting hubby through). It wasn’t easy but we did it and paid off the student loans.
We’ll be selling our home (since 1975) and moving to something rented (too much property and maintenance for the future). Bought our first home in 1973 by hubby working 3 nights a week as a bartender till all hours – then teaching the next day. Getting to debt free (Nov. 30th), getting rid of ’stuff’, and boxing up antiques for sale July 29th is starting to feel liberating. Our houses is literally sighing in relief.
For years we would say to each other ‘how did they afford that?’ ‘why can’t we go on a big vacation?’ ‘have you seen the size of their home?’ etc. Now I know. Just because some of your friends have a lot of money – it has been my experience that they live up to and beyond their salaries. Those who live within their means are the smart ones.
July 22, 2010 at 5:55 pm
Exaggerating kind of destroys the message. If you choose a 40 year mortgage (no longer available), like I did, then 80% of the payment goes to interest for the first 5 years. Way lower than 95%, although still painfully high.
Also, the biggest reason not to buy a house right out of school is that it ties you down during what can be the most mobile period of your life. The general rule of thumb is that if you aren’t sure to live in the same area for at least 5 years you should probably rent. A young single person should give themselves the freedom of career mobility, and not plan to stay with a single employer for too long unless it’s really a dream job.
I got out of school, started a family, and bought a house within 2 years of graduation and, given that I took a technical degree from a respected university, I earn slightly more than the average Canadian family, allowing my wife to stay home with our son. We’re still paying off the last of the student debt, but given that we’ve put down roots, I have a good job, and using your calculations the house only costs us $100 more than our apartment did per month, I think the argument for renting for us would be very weak.
July 22, 2010 at 6:46 pm
@Geoff
Moving to Vancouver is an expensive venture…. Rent is usually in the 4 digit range and very small.
But you do pay for a very beautiful place to live (ie the city, even if your house is a poop-hole!)
July 22, 2010 at 7:10 pm
thanks again gail for a wonderfully informative blog. i am determined to pay off my debt quickly and a daily reminder of how hard i could make that money work for me in a nice savings account is well-worth my reading the blog & the responses. i was shocked to see that i haven’t touched my newly established emergency fund – hooray – and even my savings has reached a new (tiny) level. these, along with paying off the debt, are huge steps for me.
i am fortunate that my daughter was hired straight out of university at the same place she did her internship. she is well-paid, and just received a monstrous raise. good for her…she has already dedicated that raise to paying off debt (70%) and saving (15%) and emergency fund (15%). she lives in new york city, surrounded by arts, the theatre, concerts, shopping, travel, etc…and anything that costs over $50 is a 3-day-purchase in her book; take 3 days, think about it, and if it’s that important, spend the $50. did i mention she has a “fun day account” where she deposits a certain amount each pay day? with her doctorate degree in forensic psychology, she will certainly continue to earn well. the fact that she pays attention to your blog & puts your ideas to work for her bodes well for her financial future. i notice she is really big on “house parties”, where she invites people over to her apt, or she goes to someone else’s. they all provide food & watch movies or just sit around and relax…and i think it’s helpful that her friends understand & live the same lifestyle. it’s hard to say “no, i can’t go out” but to be able to say “no, but you all can come over on friday night” makes a huge difference.
i hope more people tuning into your blog show this to their children, and spend time teaching them about responsible finances. at my age (also over 50) i know it’s not too late but it would have been better to have learned & heeded your advice say, oh, 30 years ago!
i will get there…
July 22, 2010 at 7:42 pm
Although I am not a new graduate, but I did graduate in 1994 and 2005, I have student loans still. I will have 1 paid off this year and the other 2 next year. I am lot older than most students and my life a whole lot different then most students, hence why I still have student loans.
I am in my late 30s and looking to buy my 1st home, close to my work, which fortunately for me is my old neighbourhood, and not the most desirable area in this area of town. That is in my favour. In fact, I may end up purchasing my uncle’s old home which has been totally renovated, with a basement added, and a 2 car garage: detached (he sold it back in the 80s, when unfortunately he was diagnosed with early onset Alzheimer’s.). I will have a tenant, my mother, who is an older lady, living on her pensions comfortable. Unfortunately, the rental market is at a premium here, and in the end, sharing the accommodations benefits us both. Built in security when I happen to travel, room for me to entertain, and a backyard for my mom to sit out and enjoy the summer weather.
July 22, 2010 at 9:54 pm
@ marie- It was not meant to be a criticism or to be snarky when I said that most people on the blog seem to be stuff free… I just see the posts where people say they have themselves under control and that they are where I want to be. I want to be in a place where I don’t long for the newest, latest and greatest. I have learned to delay/deny the gratification for many things but don’t like that I still have the feelings of wanting.
July 22, 2010 at 11:04 pm
financiallyfreeinbc:
Don’t worry, I understood your message. I did not want you to think that we are all at that perfect zen place (some might be but I am not).
“but don’t like that I still have the feelings of wanting.”
I fully understand that part. I don’t know for how many people it really goes away. It helps me to avoid seeing what is available and to remind myself that there is only so much time I can spend on hobbies. I am ok with limiting clothing, but not changing technology and the extras of my current hobbies.
Good luck! I spend a lot of time justifying NOT buying stuff because of choices in budget spending.