Congratulations! You did it. You crammed four years of school into five. You walked in a mere lad and now, several all-nighters and countless coffee cups later, you are a college graduate. The world is your oyster and your youth, talent and intellect help you to land your first job. Now, if you aren’t careful, you are going to make the worst mistake of your financial life. Life is different now. Instead of heading to class you are heading into the office. You are waking up earlier, shaving five days a week, washing your clothes regularly, and have sworn off of ramen noodles for the rest of your life. As you adjust to your first salaried position (not hourly), and you are making more money than you have ever made in your life you are in danger of making a big mistake:
You are about to buy a new car.
A new car you ask? That’s it? How could that be the biggest financial mistake for college graduates? What about student loans? Listen carefully to my theory on this and see if you agree:
Let’s say Joe College has just graduated from University and landed his first job. Though not a ridiculous amount, Joe is carrying some student loan debt (Let’s say 15k). Then he lands a management position making 40k a year. This is quite a paycheck compared to making $7 an hour working the front desk at the University Rec. Center. Joe doesn’t have any assets, any savings to speak of, or much financial planning of any kind. Buying a house is out of the question. Lured by the new paycheck, an embarrassment of how his 96 Neon looks in his company’s parking lot, and desire to “pay himself back” for the cheapness of college living, he purchases a new car for 24k. The payments are “easy”. Only $450 a month and he is riding in style. And now, Joe has made the biggest financial mistake of his life.
Here is why:
1. Joe has chosen to use debt to stretch his lifestyle beyond what is reasonable (purchasing a car that is 60% of your annual income is not reasonable.) This is a habit that will most likely stay with him for the rest of his life.
2. He has chosen lifestyle over responsibility. He has chosen to use his income to live better instead of cleaning up his student loan debt (opportunity cost). This is a habit that will most likely stay with him for the rest of his life.
3. He has let other people’s opinions influence his financial decisions. This is a habit that will most likely stay with him for the rest of his life.
4. He has traversed into the dangerous waters of “rationalization” to make an unreasonable purchase by convincing himself he deserved it. This is a habit that will most likely stay with him for the rest of his life.
5. He has chosen to put a lot of money into something that depreciates instead appreciates. This is a habit that will most likely stay with him for the rest of his life.
6. He has looked at the payments instead of the price tag. This is a habit that will most likely stay with him for the rest of his life.
The issue is not the car but the: “This is a habit that will most likely stay with him for the rest of his life.” The decisions will continue and the price tag will only get larger and larger. On the other hand, if Joe decides to live below his means, pay off his debt, divorce himself from other’s influence, avoid rationalization, seek appreciating assets, and look at life through price tags not payments, those habits will stay with him for life.
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