In this day and age, young adults find it harder than ever to save money. Companies direct advertising at this target age group deeming them golden in the world of consumers. From the latest fashion to a must-go concert, generation Y throws bills around like its Monopoly money. So we sat down with Dr. Edward McQuarrie, a marketing professor at Santa Clara University to talk about financial fitness.
Dr. McQuarrie is responsible for decades of market research in the fields of technology and advertising, looking at rhetoric and semiotics among other research topics. He published two books and various articles relating to his research initiatives. Serving on the board for Journal of Consumer Research, Dr. McQuarrie knows consumption patterns better than anyone. As a soon-to-be college graduate myself, I asked the doctor to enlighten me on proper financial planning given my realistic scenario.
A Potential Real-life Example
Say I get hired as a financial analyst in San Francisco, earning a $50,000 income right out of college. The decision to save will be written on my first paycheck says Dr. McQuarrie: “Saving is a principle – if you don’t start early, you probably never will.” Although the leap in income from an internship to a first-year job will probably be the most significant jump in the entirety of my career, my spending habits should remain consistent.
Professor McQuarrie believes there are essentially two ways to save: actively saving or spending less, either way budgeting plays a key role in both.
This dynamic approach requires keeping a budget, determining your marginal tax rate, and micromanaging your expenditures. If you set aside a portion of your income into a savings account early on, you will have a head start in the financial planning game. Dr. McQuarrie instructed: “you must construct a savings plan to be financially fit”, so let’s say I’ll be in the 8% California tax bracket, with a marginal tax rate of 33%, meaning I’ll have about $37,000 in taxable income.
Experts typically assume young adults have low marginal rates, however this is not always true. From a spending perspective, the benefits of a 401 k plan outweigh a Roth arrangement for a typical college graduate as a single Californian. In a 401k arrangement, deducting $100 at a marginal rate of 33% means you only give up spending $67. But a $100 contribution to a Roth arrangement (often promoted for young people) will mean $100 less in spending. Also, a typical 401k plan offers a 50% match on contributions up to 6% (varies depending on your employer). Simply put, if you contribute up to 6% of your gross salary to your 401k account your company will match it, doubling your savings! A simple understanding of savings plans will surely aid in smart decision-making towards a well-planned future.
This savings technique is all about rational decision-making in an everyday setting. Frugality will limit expenses and hopefully keep you out of debt. I could rent a one-bedroom studio for $2000 a month, or lease a Mercedes, or I could continue to share a room and bike to work – the rational decision is obviously the latter. Car payments along with insurance can significantly increase your spending, something you should avoid if possible. It may be a bit uncomfortable splitting a room, but splitting rent in half allows you to put some money away for the future.
Dr. McQuarrie reiterates the importance of tracking expenditures, religiously: “If you have no idea how much you’re spending, what your lending rate is, or what your debt/loans outstanding are, it is impossible to save effectively.”
Budgeting is essential to understand personal limits to spending. Tracking expenses each month and allocating a portion of income straight to a savings account will ensure financial fitness. It takes some form of organization to keep your expenditures in check so you are constantly aware of your financial status. Dr. McQuarrie presented this simple equation to monitor spending in relation to income, taking taxes into account.
My Salary Must = Spending / 1 – (Marginal Tax Rate + Taxes)
Possible Spending Setback
Dr. McQuarrie also touched on student loan debt, an issue plaguing many of my fellow collegians. If you face college debt, approach it as you would a savings plan – putting money aside specifically for student loan debt is the only way to get rid of it.
Say you took out $20,000 in student loans over your collegiate career. If you can save $600 a month, you can pay off your debt within three years of issuance. In severe cases, Dr. McQuarrie recommends a student loan repayment or forgiveness program. These government programs help reduce student loan debt in return for participation in certain careers, military service, or volunteer work. If this suits your fancy, check out the US Department of Education’s page on student loan forgiveness programs.
The road to financial fitness takes hard work, as does any successful path in life. So set the pace early on – managing your spending habits and allocating money towards a savings account now will only benefit you in the future, trust Professor McQuarrie, he’s a doctor.