Managing your debt level
- What I want to dig in a bit in this video is student debt. And I'll start off with some averages. So at the time of making this video, the average debt, the average balance, that an American student graduates with is 27,000 dollars. Now this isn't necessarily the entire cost of their education. They might have gotten help from other folks, they might have had a work study, maybe their parents helped out, maybe they got a scholarship from someone but this is the average student loan balance. Once again, just an average. Some people might have a lot more than this, some people might not have any student loan balance. And the other average is is that the average term for a student loan, so this is the time period over which you are expected to pay if off, is ten years and once again, these might change over time but I'll use this as a reasonably good example to frame our discussion. And at the time of making this video, this is likely to change over time but the average interest rate, interest rate is 6.8 percent at the time of making this video. And if you take these inputs and there are student loan calculators, payment calculators on the internet, in fact you could even use mortgage calculators if you say it's a ten year term, you're borrowing 27,000 dollars and it's a 6.8 percent interest rate and you zero out all the other assumptions, then the payment that you would have, this obviously isn't a mortgage but it's the same idea. You're borrowing some amount of money, you have an interest rate and you want to pay the whole thing off over some type of a term. So if you were to input all of that into a kind of loan payment calculator, you would get that the average monthly payment given these assumptions are going to be 310, a little over 310 dollars per month. And so let's just think a little bit about if we make these assumptions, how easy or hard this might be to pay off and then we can start to stretch theses assumptions a little bit. What if your balance is four times this? So, I looked up some more averages. This is kind of what you have to pay, this is the debt. So let's think about income and expenses. Income and expenses. So the average and once again, this is at the time of making this video. I encourage you to look it up just to verify what the averages might be whenever you happen to watch this. But the average income for a college grad at the time of making this... or maybe I should write average salary. Average salary is 45,000 dollars, 45,000 dollars and then I looked up the average paycheck. Average paycheck which they have as 1,299 dollars and actually, let's see if that actually makes sense. So if I'm making 45,000 and if I assume I have bi-weekly paychecks. So I'm going to have 26, there's 52 weeks in a year, so I'm going to have a paycheck on half of them, so I'm going to have 26 paychecks in a year. That means that my salary before paying taxes and other things, is going to be 1,730 and so this actually makes sense because if you were to take, let's see this looks like it's about, if we say 1,299 divided by 1,730 it's about 75 percent. So this is assuming that you're paying about 25 percent of your effective tax rate is about 25 percent and that includes your state and your Federal Income Tax and your Social Security benefits and all of that and so this seems actually like the numbers right over here make sense. But we have a few more averages. So let's see this average paycheck and let's just translate everything to a monthly basis. So this is going to be approximately, this is going to be approximately 2,600 dollars a month. This is your average take home. Take home pay. So if you're making 45,000 and you have all of these other assumptions, that means that the average college grad has 2,600 dollars a month to pay all of their expenses and hopefully also have some savings. So now let's think about the expense side of things. So most people's largest expense is housing and the average rent at the time of making this video is 821 dollars. Now this is the average across The United States, you can imagine if you're in a high rent place like New York or San Francisco and you're not living with three people in the same room, you're going to have to pay a lot more than this but let's just go with the averages. So you have that rent right over there. And now let's just make some other assumptions. Let's say transportation also tends to be a pretty significant expense. Let's say, between your car and gas and maintenance, you have to spend 300 dollars a month in transportation. And obviously you can tweak these assumptions if you think they're too high or too low or if you want to drive a fancy car or maybe you could use public transportation, this would be lower. And then of course you have to feed yourself. And so let's see, let's say you spend 100 dollars a week which isn't an exorbitant amount to spend on food. So you could probably spend less if you cooked a lot. But let's see, 400 dollars would be per month, four weeks in a year, four weeks in a month. So you're going to spend 400 dollars a month on food. And then let's see, what does that leave you with? That leaves you with, so 2,600 dollars, minus 821, minus 300 dollars, minus 400 dollars, that leaves you with, let's see, that leaves you with 1,079 dollars. That leaves you with 1,079 dollars. Now you might say, "Hey, this is pretty good, "I have 1,079 dollars." But we have a couple of expenses that we haven't paid for yet. We haven't paid our average student loan balance. So let's subtract that out. So my previous answer minus 310, 72 gets us 768 dollars. And you might say, "Okay, that's pretty good." "I'm saving 768 dollars per month." But of course, we haven't put any fun in here. You haven't gone to the movies yet, you're going to a show or hanging out with friends or whatever it might be. And so if you put an entertainment budget in there and it depends on how much you like to party. But let's just say that that's just 200 dollars a month, 50 dollars a week, which sounds actually pretty economical. So that get's you to 568 dollars. So, you still have some savings. That's not bad, especially early in your career. If you're able to put some money aside, this is pretty good. Now, what I want to keep in mind is this is given these assumptions. Now let's stretch these assumptions a little bit. For example, if instead of your student loan balance being 27,000, if your student loan balance is say four times that and it was 108,000 dollars, now all of a sudden, this 310 dollars is going to be four times a high as well. So that's going to be approximately 1, 240 dollars and so if this was your student loan balance, now all of a sudden this world looks a lot worse. Before having fun and before paying off your loans, you only have 1,079 which is less than what you have to pay for you loans. And now you might say, "Maybe I make more money than that." And that's definitely possible especially as you get more and more experience and get more and more skills in the workforce, your income could go more but you just have to keep in mind. There's an expectation that you pay this if you're balance is 108,000 dollars from the get go, from the get go. So it's not even where you're going to get to, it's where you are going to start. You're going to have to find a reasonable way to pay this amount. The other things that you're going to have to really, really think about are these assumptions right over here. The average salary, you might have a point in time where you're between jobs, where you want to explore something. So that's a very important thing to take in to consideration. And of course, we already mentioned, this rent number is an average for the nation. But if you live in an urban area, especially an expensive urban area, your rent could be substantially more than this and frankly all of your other expenses are probably going to be more than this. And so you can see when your student loan, when your debt becomes more and this is a debt number, there are definitely a lot of folks with debt numbers like this. You have to feel comfortable that you're going to be in a situation upon graduation where you can make this type of payment after your, really your necessities. After food and living and transportation. So, not saying student debt is good or bad. I tend to think that an education is a very, very good thing. It's a very good investment. It's one of the best assets that you could have. But any asset, you should always be thoughtful about how much you're going to pay for it and what type of a return you can get and whether you can pay for it. And so hopefully, this just give you a little bit of a framework for thinking about that.