Cover Story

You just graduated, you owe thousands of dollars in student loans, and you may pull in only $40,000 to $50,000 a year in your first job as a psychologist. Are you doomed for bankruptcy?

Not if you manage your money-even the little you do have-wisely, says financial adviser Flora L. Williams, PhD, professor emerita of consumer sciences and retailing at Purdue University. When first starting out, you might not be earning the big bucks quite yet (see Starting salaries for psychologists), but as you gain work experience, the investment you made in your education will pay off, Williams says.

But in the meantime, make every penny count, say financial advisers. They recommend students and new professionals make lifestyle sacrifices, seek additional income—such as with part-time jobs or graduate assistantships—create a budget and hatch a savings and investment plan early on.

Taking such action now is key because delaying may wind up costing you more later, says Williams, author of "Financial Success for College Students: Climbing the Steps from Financial Dependence to Independence," available for free at www.colfinancialsuccess.com.

"There is hope," Williams assures in-debt graduates. "But you can't have it all when you graduate, and what is ideal—such as a nice new car and apartment—is not usually what is adequate."

Here are steps you can take to better control your finances.

  • Budget
    First off, beware of a common financial mistake: underestimating your expenses and overestimating your future income.

To avoid that, Joshua Hrabosky, a clinical psychology doctoral student in the Virginia Consortium Program, uses a computer spreadsheet to keep track of his finances. He records the amounts he pays for essential items—like rent, tuition and groceries—and other expenses, like entertainment and miscellaneous costs. At the end of each month, he calculates his expenses and budgets for the next month.

"By keeping this budget, I have been continuously aware of my limits within each month and have been able to keep my expenses at an acceptable level that prevent me from going too much further into debt than I already am," Hrabosky says.

  • Pay off debts
    Minimize the credit card debt you accumulate while in school and pay it off as soon as possible, Williams advises. Credit cards' high interest rates—sometimes up to 20%—can make small purchases snowball into unmanageable debt. However, student loans offer more repayment options and lower interest rates.

Moreover, the more debt you accumulate, the bigger impact it can have on your transition from student to professional. Landlords, employers and insurance and mortgage companies can view your credit record and become alarmed if your finances are a mess, Williams says.

Rakefet Richmond, PsyD, a 2003 graduate from Indiana State University, monitors her credit card charges to avoid paying back debt at high interest rates. "If I cannot pay the full amount on my credit card one month, I will cut it up," Richmond says.

To help pay off his debts, Luis Felipe Morales, a graduate student at Pepperdine University, pays about $115 per month to fend off accruing interest and chip away at the principal of his $18,000 student loan debt from his undergraduate program, even though his loans are deferred while he is in school. He also carries $12,000, so far, for his first two semesters in graduate school and pays the interest on his graduate loans.

  • Save
    As soon as you start working, put 5–10% of your salary in a savings account or credit union, financial advisers suggest. Have it automatically deducted from your paycheck, adds Williams, so that instead of looking for leftover money from your paycheck each month you have a set amount devoted to savings.

"At first, you might be putting it in and then taking it out, but it still helps start a discipline to save," Williams notes. Having a spare jar to throw extra coins in is another simple way to start saving, she suggests.

Financial advisers recommend putting away the equivalent of three to six months of your average monthly expenses to be prepared for any unexpected expenses—like pricey car repairs or a health emergency.

  • Invest
    Once new professionals have created an emergency fund, Williams then advises them to invest. Such investments as real estate, retirement plans and stocks can offer big returns in the long term, but starting early with investments is key to getting higher returns, she adds.

Also, by laying a stable financial footing now, you can set a path to retire early. For instance, a new professional who saves $2,000 per year for just six years in an Individual Retirement Account (IRA) can earn up to $1.2 million in their IRA by age 65, she says.

Williams also recommends taking advantage of employers' tax-deferred money investment options—such as bonds or retirement investment plans, like a 401K.

However, investments can carry risk: There is a chance of losing money, such as if stock prices fall. To counter some of that risk, Williams recommends diversity in investments, such as by holding:

  • Liquid assets, like checking or savings accounts

  • Nonliquid assets, such as real estate, that appreciate over time

  • Assets with marketability—such as stocks and bonds—that can earn high returns but can carry more risk than other investments

  • Buy smart and sacrifice
    Financial advisers say new professionals who carry heavy debts should be prepared to make some lifestyle sacrifices at the beginning—such as by opting for affordable housing and skimping on some luxuries—so they live within their means and gain control over their finances.

Sean Casey, PhD, a 2002 graduate of the University of Utah, says he has learned to watch his expenses. He recommends cutting costs by buying basic living items, like dishes and cookware, at local thrift stores and learning basic maintenance and repair skills, such as changing the oil in your car.

"It might not seem like a lot, but it adds up," he says.

To buy smart with larger purchases, such as a car or computer, Williams suggests using the "rule of three"—compare three products at three different places with three types of financing.

Some sacrifices that can also save money:

  • Share an apartment to reduce rent costs

  • Live close to work and take public transportation to forgo a car payment

  • Monitor your food expenses. Eating out and buying groceries are one of the largest expenses for new professionals—averaging about $400 to $500 a month, Williams notes. That makes unnecessary food expenses a prime area in which to cut costs.

  • Supplement income
    If you still feel as though your current income isn't enough to cover your expenses, consider a temporary second job to pay off student loans and then use your main job to pay for living expenses. A job as a waiter, store clerk or consultant may be worth the extra work and extra time to help gain greater control over your finances, Williams says.

While debts and limited finances may seem discouraging now, Williams says students should take comfort from the graduate degree they earned.

"You have a degree, and that is wealth; it is human capital," she says. "It may not feel like financial wealth now as you are paying back the debts, but once you do [pay back the debts], you will have a new financial freedom."


HOW DO YOU KEEP A HANDLE ON YOUR FINANCES?
Join gradPSYCH's listserv at www.apa.org/apags/members/listserv.html to swap advice with fellow grad students.