Forming a Financial Footing
With the right plan and discipline, today’s graduates can get on track to financial stability
By Kent Walton
Megan and Matt Nelson jokingly refer to their 2009 Honda Accord as their “new car.” Their “old” car? It’s a 2004 Lexus fully loaded … with a cassette player.
For these young parents and 2011 UNO graduates, living frugally isn’t something new; it’s the way they were raised.
“Matt and I are mavericks in how we think,” Megan says. “We accomplished things against the odds. A lot of that is due to our education at UNO.”
While being frugal means they might miss out on some luxuries, the couple agree that they wouldn’t have done anything differently.
“If there was a Webster’s Top 10 Ways to Save Money, we have done them all,” says Megan, 31, who holds a bachelor’s degree in speech communication and marketing and a master’s degree in public administration, both from UNO.
Megan is employed by UNO as a part-time communications coordinator for CPACS and is the founder of Oil Up Omaha, an essential oils community. Matt, 30, earned a bachelor’s degree in secondary education from UNO and a master’s degree from Indiana University. He is the associate director of community experience for housing and residence life at the University of Nebraska-Lincoln, where he also is pursuing a doctoral degree.
The Nelsons admit they had a big advantage over their peers when they were starting their family. Matt’s first job after graduation allowed them to live in the residence halls rent-free at Creighton University and at UNO for two years after they graduated. They used this unique living arrangement to start saving, investing and paying off student loans.
As a result, the Nelsons, who are buying their home and have two young children, will have all their student loans paid off this year.
They credit their stability to the advice of family members and their financial advisor, along with extra income brought in by
side hustles.
Student Loan Debt
That firm financial footing puts the Nelsons ahead of most millennials.
2019 marked the final year the majority of the millennial generation will graduate college, and multiple studies show they will have a steeper uphill climb than previous generations as they struggle to find their financial footing.
The Brookings Institute recently revealed median household wealth for people ranging in age from 20 to 35 was about 25% lower than it was for that same demographic just 13 years ago.
So, what robbed this generation of its financial stability? The biggest culprits were the 2008 financial crisis and the skyrocketing cost of a college education.
At the end of last year, student loan debt had reached a record-high of $1.5 trillion, with the average debt per graduate at $29,800, according to Student Loan Hero, a resource that helps students organize, manage and repay student loans.
“The data suggests large loan payments are causing current graduates to delay life events that previous generations undertook earlier,” says Brian Payne, a UNO assistant professor in the Department of Finance Banking and Real Estate and a Certified Financial Planner.
“Events such as getting married, buying a home, or starting a family are all delayed, at least in part, to young professionals’ desires to get on stronger financial footing.”
Payne and a coauthor are conducting research that has revealed a statistical link between being late on student loans and subsequent personal bankruptcy. Both unfortunate circumstances can have significant and negative long-term impacts on a graduate’s financial well-being, he says.
For recent college graduates shouldering large student loans, it may be difficult to decide where to focus – paying down debt or building up savings. But Payne suggests their priority should be developing financial discipline.
“Once a person can understand the relationship between what they earn and their living standard, as well as the difference between needs and wants, they have a solid financial foundation and are on their way to future financial success,” he says.
They then should focus on a strategy that will pay them the highest rate of return on their money.
“Let’s say retirement savings is going to earn 9% per year in an investment portfolio. If a person is carrying credit card debt with a 20% interest rate, then it makes the most sense to pay down that credit card first, effectively making a 20% return,” Payne says.
“On the other hand, if one has a mortgage with a 3.5% rate, then it can make financial sense to make just the required mortgage payments and, using any other discretionary funds to save for retirement, making 9% while paying 3.5%.”
Living Beyond Means
While carrying a manageable level of debt is acceptable to some people, Payne cautions that historically low interest rates have led to many people borrowing beyond their means as a primary way to pay for things they want.
“That can quickly get us off track,” he says. “It seems almost every store has a financing option for the things we buy. Getting lulled into this trap can be a very costly financial decision and create a dangerous pattern.”
Unfortunately, a lack of formal financial literacy programs has left many ill-equipped to develop healthy financial discipline, Payne says.
A recent FINRA survey revealed only about one-third of Americans can get more than 50% correct on a simple 10-question financial literacy quiz.
“Fortunately, there are an abundance of resources out there, with many of them free and online,” Payne says. “Among them all, one of the best that I’ve seen is the KEES Financial Literacy program right here at UNO in the College of Business Administration.”
Each semester, this program hosts a series of presentations from local financial experts on topics such as budgeting, investing, saving for retirement and home buying and selling.
The Nelsons admit they were not financially savvy when they graduated college and relied heavily on the advice of family members to help them with major purchases and developing a financial plan.
With the help of a financial advisor, they set up universal life insurance policies for their young kids to help them with educational expenses, should they choose to attend college. They are paying into an individual retirement account and pretax 403(b) retirement plans offered by UNO and UNL.
Because they opted to save money while living in the residence halls, they were able to purchase a larger home than a traditional starter home and buy their first cars with cash.
Payne recommends young college graduates hire a financial advisor who can help them develop a financial strategy and a budget.
Not long ago, it could be a challenge for recent graduates with few assets to find an advisor who would take them on as clients. But the rise of online “robo-advisors,” that provide inputs for nominal fees and, in many cases, very low minimum account balances, has helped alleviate this problem.
Payne also advises young professionals to contribute the maximum allowable amount to a pretax savings program, such as a 401(k) or 403(b), especially with employers who will match their contributed funds.
“To the extent they can afford to do so, they should save as much as they can to get any free matching money from employers, as that is a 100 percent return on their invested funds,” he says.
“There is no credit card or student loan that will charge 100% interest, so they are coming out ahead by getting any matching funds.”