Discussion on Managing Income Risk and Impacts of Past Choices and Decisions
The topic of managing income risk, from the perspective of a college student, is interesting because students come from a variety of financial backgrounds and face potentially very different situations when it comes to their financial futures. Some students come to college fully funded by their parents, while other incur a tremendous amount of debt via student loans. Others, and I believe this is where the majority of students fall, are somewhere in between. I think it is important to consider which category (or in between categories) a student falls because it may have affected their choices and management of future uncertainty while in college. Students who have loan debt may have been trying to work as much as possible during school to start saving or even start paying off their student loans, while others may or may not have had a similar decision making process.
Without getting too personal, I am one of the people who falls somewhere in the middle of the categories I previously described. I have been fortunate enough to have the help of my parents for the major expenses, but have also learned the value of the money I do make. To dig into the decisions I have made, I will start way back to the time when I was first earning my own money. When I was 10 or 11 years old, I started offering to cut the grass of my neighbors for whatever they would pay me. At anywhere between $10 and $20 (generous), I would take home a decent haul doing a few yards each week. I continued to do this through high school as a nice way to earn gas money and money to spend on silly things like fast food and video games. However, from the very first time a neighbor paid me for my work, my parents made me start a savings account and put in half of the money I earned into the account. This frustrated me at times, as I didn't think they should be able to tell me what to do with my money. "If you start to save now, someday you will have enough money to buy something you really want like a car or a house," they would tell me. While they never gave me an allowance or really any extra spending money, they instilled the value of managing future income uncertainty in me at an early age.
Moving forward to decisions and choices I have made in college, I have definitely been conscientious of saving for the future. I think that most of my classmates in this course would agree, since we are all Economics majors, that choosing the Economics major was partly due to our strong analytical mindsets, and partly due to a fairly strong future earning potential. Forbes and other publications list the Economics major in the top tier for earning potential after graduation. That decision I made was clearly thinking towards managing future income uncertainty.
Another major decision that most college students make is where to work and how much to work. Personally, I have enjoyed having a job throughout my college career, as well as during the summers. In the summers, it has been part time jobs and internships, and during the school year I have managed a way to work around 20 hours a week. However, it has been important to consider the nature of the work I have done. I have never been a proponent of working just for the sake of working, rather I prefer part time jobs and internships that will provide some future utility, in addition to wages. I seek experiences that will allow me to develop leadership and other important skills, support my long term career goals and that are things I can confidently talk about in interview settings. In contrast, many students I know choose to work at campus bars due to the current earning potential being much greater. A bartender can make seemingly endless amount of money in tips, which is great if you desire money now, but doesn't necessarily add much to an individual's future earning potential. I think it is important to balance current earning potential with the external benefit that other lower paying jobs (that are related to career goals) will provide. I have chosen the latter during my time in college.
Fortunately, I have no accumulated any student debt. This is a huge factor in managing the uncertainty of future income. I have been able to start saving for the future without the baggage of debt weighing me back. Because my parents instilled the idea of saving early on as I mentioned before, I have a solid foundation of savings that I will be able to use later on. While I still need to find a job and start earning a real salary, I have a little bit of a cushion due to the actions of my past.
Another topic I would like to touch on is the idea of study abroad. It seems like more students than not participate in a study abroad experience at some point during college. I haven't due to the high cost and little perceived benefit in my opinion, but many do. I think this ties back in to the type of financial situation a particular individual comes from, as for some it is much more feasible. But, I also think that the ability to have adventures and experiences in life will come with working hard and continuing the actions I have in the past in relation to managing income risk. I don't think it is necessarily something that needs to be done while in college.
Unfortunately, I don't have a close mentor or older sibling who has gone through this process before, but I have had parents who have mentored me throughout my life about the value of money and managing the future uncertainty of income. They have given me a lot of great advice in this regard and so far, it has been an advantage to me to consider and use this advice in my decision making.
Without getting too personal, I am one of the people who falls somewhere in the middle of the categories I previously described. I have been fortunate enough to have the help of my parents for the major expenses, but have also learned the value of the money I do make. To dig into the decisions I have made, I will start way back to the time when I was first earning my own money. When I was 10 or 11 years old, I started offering to cut the grass of my neighbors for whatever they would pay me. At anywhere between $10 and $20 (generous), I would take home a decent haul doing a few yards each week. I continued to do this through high school as a nice way to earn gas money and money to spend on silly things like fast food and video games. However, from the very first time a neighbor paid me for my work, my parents made me start a savings account and put in half of the money I earned into the account. This frustrated me at times, as I didn't think they should be able to tell me what to do with my money. "If you start to save now, someday you will have enough money to buy something you really want like a car or a house," they would tell me. While they never gave me an allowance or really any extra spending money, they instilled the value of managing future income uncertainty in me at an early age.
Moving forward to decisions and choices I have made in college, I have definitely been conscientious of saving for the future. I think that most of my classmates in this course would agree, since we are all Economics majors, that choosing the Economics major was partly due to our strong analytical mindsets, and partly due to a fairly strong future earning potential. Forbes and other publications list the Economics major in the top tier for earning potential after graduation. That decision I made was clearly thinking towards managing future income uncertainty.
Another major decision that most college students make is where to work and how much to work. Personally, I have enjoyed having a job throughout my college career, as well as during the summers. In the summers, it has been part time jobs and internships, and during the school year I have managed a way to work around 20 hours a week. However, it has been important to consider the nature of the work I have done. I have never been a proponent of working just for the sake of working, rather I prefer part time jobs and internships that will provide some future utility, in addition to wages. I seek experiences that will allow me to develop leadership and other important skills, support my long term career goals and that are things I can confidently talk about in interview settings. In contrast, many students I know choose to work at campus bars due to the current earning potential being much greater. A bartender can make seemingly endless amount of money in tips, which is great if you desire money now, but doesn't necessarily add much to an individual's future earning potential. I think it is important to balance current earning potential with the external benefit that other lower paying jobs (that are related to career goals) will provide. I have chosen the latter during my time in college.
Fortunately, I have no accumulated any student debt. This is a huge factor in managing the uncertainty of future income. I have been able to start saving for the future without the baggage of debt weighing me back. Because my parents instilled the idea of saving early on as I mentioned before, I have a solid foundation of savings that I will be able to use later on. While I still need to find a job and start earning a real salary, I have a little bit of a cushion due to the actions of my past.
Another topic I would like to touch on is the idea of study abroad. It seems like more students than not participate in a study abroad experience at some point during college. I haven't due to the high cost and little perceived benefit in my opinion, but many do. I think this ties back in to the type of financial situation a particular individual comes from, as for some it is much more feasible. But, I also think that the ability to have adventures and experiences in life will come with working hard and continuing the actions I have in the past in relation to managing income risk. I don't think it is necessarily something that needs to be done while in college.
Unfortunately, I don't have a close mentor or older sibling who has gone through this process before, but I have had parents who have mentored me throughout my life about the value of money and managing the future uncertainty of income. They have given me a lot of great advice in this regard and so far, it has been an advantage to me to consider and use this advice in my decision making.
You discussed a persistent attitude of saving, something instilled in you by your parents, as a way to manage income risk. I'd like to point out some generational aspects to that. My parents came of age during the Great Depression. They knew what poverty was like - they lived through it. They were very big savers thereafter. My generation never knew depravation like my parents knew. But, somehow, some of their attitudes rubbed off on me.
ReplyDeleteNowadays there are ways to do this that really don't take much thought. You sign up for a savings plan and the money is withheld from your paycheck, so you never go through the choice of whether to spend it or not. This switches things from an issue of character to whether you've signed up for the 401K plan. And the behavioral economists have taught us that if the default is that you're already signed up, then more people will save.
There is a different issue that you might have addressed in this - keeping up with the Joneses. Are your consumption needs dictated by your own preferences and only that? Or do they depend to some extent by what you observe of your friends and their consumption? If you can imagine a cohort group of friends who have differing income, the poorer among the group are under some pressure to keep up with the wealthier in the cohort. That sort of pressure creates an opposite incentive regarding saving. The question is how to counter that. Will the poor kid's friends think less of the kid because he spends less?
When I was in college, at Cornell, there were plenty of very wealthy students, but the culture of the place was to not display wealth. When I became a grad student at Northwestern, it seemed the culture was different, as measured by how the undergraduate students dressed. I have this feeling that the U of I is somewhere in the middle and also that things may have changed in those 40 years or so.
Let me switch gears and react to your comment about study abroad. I don't want to endorse that, per se, but I think it is useful to be outside your own realm of experience. If you went to high school in Illinois and had a bunch of others from the your high school attend here as well, there is a question of whether you ever got out of your own comfort zone and had truly novel experiences - both good and bad - that challenged you and would make you grow. I think it is possible to have such experiences even while staying on our own campus, but you have to look for them. Study abroad might be another way to do that, though I believe some students stay cloistered even when they are abroad and thus miss the opportunities for personal growth.
I'd like to start by addressing the idea of how technology has changed the way people save and deal with their money in general. The evolution of online banking and payroll systems have paved the way to saving one's money more efficiently. Every job I have ever (other than the lawn mowing) had has had a direct deposit method as opposed to a physical paycheck. In some ways, it might not be as gratifying when you get paid as the time when you would actually receive a physical confirmation of your work. I think that most people in my generation would be the same in that they have never received a physical paycheck, which is a stark contrast to generations past.
ReplyDeleteAs you pointed out, these systems also enable one to save more effectively by setting aside a desired proportion of each paycheck into a savings account or what have you. However, I have never done this. I want to see the full amount I make on each paycheck and make the conscious decision to put a proportion (usually 50%) into savings. I think it is good practice to manage my money in that way, especially because there may be a time (perhaps soon) where I can't afford to save the same proportion that I currently do. It also may change when I am making a prescribed amount each pay period on a salary, as opposed to the hourly pay that I am accustomed to in my part time work.
Similarly, my parents think it is beneficial for me to manage my expenses, even if the money isn't coming from the fruits of my own labor. While they help me to pay for school, rent, and food, they don't simply pay the credit card bill and deposit the correct amount of money. Instead, I am responsible for providing the amounts I need to necessary expenses, but I manage the payments for everything. Now, I am old enough where I would do that anyway, but I think that early on it was good practice for me to see the money I needed and be accountable for paying the bills, even if it wasn't truly my money.
To address your comment on the attitude of students at the University of Illinois currently, it is my opinion that they (we?) fall a little more under what you described from your time at Northwestern. I think that people do try to demonstrate their wealth not only through the things they physically own, but also through their actions. Many students frequently go to expensive sporting events or concerts, or spend oodles of money out at the campus bars multiple times per week because they, or should I say their parents, are footing the bill for everything. I don't mean to criticize anyone's way of life, but I feel that I am different than a lot of students here in that I don't fall back on my parents to demonstrate wealth or the ability to have lots of possessions or participate in extravagant activities.
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ReplyDeleteThat leads me into addressing the homogeneity of the student body at Illinois. Setting aside international students, which is a large and much needed diversification of the demographic makeup of campus, a vast majority of students here are the same - Well-off, white students from the suburbs of Chicago. They seek the same experiences - greek life, parties, and a high paying job in business or engineering after graduation. And those students probably do need study abroad to get themselves outside of their comfort zones. While I do fit that description in some ways, I also feel very different in more ways. I'm from Oswego, which by definition probably is a suburb of Chicago, but I lived next to cornfields and my town was small enough where I knew almost everyone in my high school class. I don't participate in greek life, but still find myself heavily involved on campus. Furthermore, I didn't initially attend the University of Illinois after high school, even though it was where I thought I would always end up. I first went to the University of Oregon, where I found myself immersed in a very different culture than I was accustomed to in Illinois. Spending several months in a place where I knew absolutely no one was an eye-opening experience for me and definitely challenged me to grow as an individual. The ending of the story is obvious, so I came back to the school I grew up thinking I would attend seeking a slightly higher level of comfort. Yet, I only had a few classmates at U of I, none of which were close friends, so I still had to forge new relationships and try new things. It ended up being the best decision I could have made, and I really view my time in Eugene, Oregon, as equivalent to a study abroad experience would be for another student.
Your example of earning money at a younger age and saving it, reminds me of my own past too. I didn't had a saving account till high school or something, moreover I used a money-box (piggy bank). I saved my coins and when I had enough I could buy a LEGO box or something. It kind a of gave me the feeling of achievement, because I saved it all by myself. This was a big expense at that time for me. Nowadays with loans from my government and money from my parents, many of my expenses doesn't give that same feeling as it did when I earned the money it all by myself.
ReplyDeleteI believe that your thought about considering the future upon choosing a job right now, is a good one. I have also friends who work in bars and they do earn a lot of money, however they spend it all twice so fast too. However, those jobs often give you some other advantages such as networking and the extra money gives your opportunities to consume more. I believe that finding a good middle way here is the best. Having a job related to your major is great, but working at a bar for 1 year can sometime be even more beneficial because you create a different set of skills.
I believe that study abroad can have different impacts on different people. First of all, it depends what kind of person you are; very closed, to their selves, people are more likely to stay in the comfort zone than others. However, going outside of the box and leaving your safe environment, can really benefit everyone. I know it might be a financial issue (the same is for me), but the advantages weight a lot more than that. Again, it depends from person to person, but I've never heard someone saying that studying abroad/going abroad/work abroad/follow a summer course abroad etc, was a bad decision. Maybe you won't see the benefits immediately, because most of it is personal growth and development, however I believe that doing something outside of the box (and yes this can also be on campus as you mentioned) is really useful. As we say in The Netherlands: 'nooit geschoten is altijd mis' --> never shot is always wrong --> never ventured, nothing gained.