Graduates – Live a Little Without Stretching Yourself Thin

  • Facebook
  • Twitter
  • Delicious
  • LinkedIn
  • StumbleUpon
  • Add to favorites
  • Email
  • RSS


by Brandon Foster-Gray

This one is for the recent college graduates out there, or undergrads looking to graduate in the next year or two. This post involves a bit of math, but put away your calculator; I already did the work for you. Before we get started, I want to ask if you have seen the classic scene from The Cosby Show, where Dr. Huxtable uses Monopoly money to explain to Theo how the real world works. If you have not seen it, do check it out!

P.S. Dr. Huxtable is using 1984 values. Double those dollar amounts to adjust for inflation.

Today we will borrow from the Good Doctor’s economic lesson, and create our own hypothetical scenario…pay attention. While preparing to graduate (if you have not already), you of course started searching for a job…something in your field, although any paid position works. You land a job, and start work two weeks after receiving your degree, just enough time to reward yourself with a little vacation.

As you get into your job, you decide to reward yourself for entering the corporate world. You want to buy a new car, maybe even get an apartment. You have priced the model you want, and you checked out the neighborhood you plan to move to. However, you forget one tiny detail, one you may not have heard of.

THE DEBT-TO-INCOME RATIO

What is the debt-to-income (DTI) ratio, you ask? Simply put, it is your total monthly debts (student loans, car payment, credit cards, etc.) divided by your gross monthly income (what you bring home before taxes). For a mortgage, the lender usually asks for a maximum ratio of 36%, while some may try to go even lower. In other words, no more than 36% of your gross income should go towards debts.

MATH TIME!

Say you find a position in your field that pays $18 an hour. Time to add that all up.

$18 x 40 hours = $720 a week

$720 x 52 weeks = $37,440 a year

$37,440 / 12 months = $3,120 a month

So you make $3,100 a month, give or take. Now the debt. You have your student loans; say that totals $35,000. The standard repayment plan is 10 years, or 120 months. However, there is also an ugly little thing called interest, which accrues daily, increasing your monthly payment even further. The longer you wait to make a payment, the more interest accrues by the day. According to Mapping Your Future’s handy calculator, the monthly payment on a $30,000 loan is $345. Remember that number.

 

Buying a Car
You want to buy a new car. When it comes time to purchase, the dealer looks at your credit, which should look good unless you went crazy with credit cards or did something drastic like walk away from an apartment lease. Taking all that into consideration, your car payment comes to $400.

$400 car payment + $345 student loan = $745

Throw in a $50 monthly credit card bill, and you now stand at $795. Now time to determine your ratio.

$795 / $3,120 = 25.5%

So far, you are in good shape, or are you? Remember, that debt-to-income ratio looks at your income before taxes. Depending on where you live, that can vary, but we will say 25%, which is $780.

$3,120 – $780 = $2,340

Renting an Apartment

Deduct your $795 in debts, and you now have $1,545 each month. You will of course need insurance (say $150) and gas money (hmm…$200/month).

$1,545 – $350 = $1,195

After all that, you may want an apartment. One difference is property managers usually compare the rent amount to your income, and not the other debt. In most cases, your rent should not exceed 30%.

$3,120 x 30% = $936

$1,195 – $936 = $259

Going back to Dr. Huxtable’s little game of Monopoly, do not forget “You haven’t eaten yet!”, nor have you paid your utilities, or gone out with friends. All of that probably costs (wait for it) $259.

That $936 is assuming you live alone, or rent at the maximum 30%. If you must move out immediately, strongly consider a roommate and put a few hundred bucks back in your pocket, or better yet, in savings. At your age, now is the time for you to socialize and live it up with friends!

Remember, that scenario of you finding a job right out of school – in your field – does not happen every day, so you may have to take a job at the mall to make ends meet. You may also have to live at home for a year or so, and you may have to forget about that new car for now.

There is no shame in doing any – or even all – of those things. Build your savings account, and more importantly, your credit score, and all those things will come to you later. I know what it is like to want to celebrate your achievements, but make sure the time is right. Do not be afraid to live your life, just splurge wisely. Also, I live by Frugal Village’s budget calculator. It gives a great outlook at how much you have to work with every month. I highly recommend it!

 

Brandon Foster Gray Our guest contributor:  Brandon Foster-Gray is a 2005 graduate of Hampton University (Virginia), and currently resides in Norfolk, VA. In March 2013, he created The Student Union (www.the-student-union.com), a blog that offers high school and college students lessons about the “real world”, and advice on how to avoid falling into financial trouble.

Brandon Foster-Gray (1 Posts)


Speak Your Mind

*