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General Financial Advice

In General Financial Advice

What to do with windfalls?


A few weeks ago some people were scrambling to finish paying their taxes (not you, you finished yours a while ago, right?). About now a slow trickle of the magical “tax refunds” are being disbursed to people around the United States. “Wow, this is cool!” they will say. “I just got $3,000, time to go buy that (fill in the blank) I’ve always wanted but have been too irresponsible with my money to save up for!” “Never mind that the responsible thing to do would be to pay down my (fill in the blank with student loans, mortgage or credit card debt), I want new cool stuff that will bring me temporary and hollow happiness!”

I know none of the people reading this are that person, but there are a lot of people who think exactly this way.

*quick aside*

If you pay money to the government in the form of income taxes, your tax refund should be as close to zero as you can make it. Unless you’re cool with the government borrowing the money you’ve earned interest-free for months at a time, you should do some math to figure out how many deductions you should claim to ensure you’re contributing as much as you should, but no more. There are a lot of good tax calculators out there you can find with a quick Google search to help you do this. Then it’s a simple matter of reaching out to your HR department and having them adjust your withholdings.

There, now you’re accumulating that $3,000 as you earn it, providing you with the awesome ability to put that money to work right away. If you do, you’ll now have a “tax return” of $3,116.22 for the year (assuming a 7% rate-of-return invested monthly throughout the year). That’s not too bad for completing a few easy tasks! You’re welcome.

*end aside*

The question for this week is, what do you do when a large and somewhat unexpected chunk of money comes your way? This question came about a few weeks ago when, on one fateful day, I checked my mailbox and found not one, but TWO pieces of mail notifying me of upcoming drops of money into my financial bucket.

The first informed me that it was time for the annual “University of Michigan Family Economics Study” survey. This is a fantastic study that measures household financial health through generations. I was fortunate enough to marry into this study. For my trouble (and detailed information about my financial situation) I will be compensated with $75! Not bad for a simple phone conversation.

The second bit of mail told me that I was a part of a class-action law suit because a past employer had been doing some shady things and that now, five years later, I was being made whole. I had to send a post-card to opt-in to the suit. Once a certain date has passed I will be mailed a check for my portion of the award. The expected sum: $125. Not exactly enough to retire on, but I had written that money off a long time ago and I will welcome it to my bank account gladly and with open arms!

One day, two pieces of mail, $200.

The individuals in our tax example above would immediately formulate intricate plans for their windfall. A new thing for the house or car, a fancy meal or something else equally unnecessary. Being exceptionally boring and predictable my windfalls will go immediately to the category of my budget titled “Income: to be budgeted.” My prediction is that, once I’ve reconciled my budget for whichever month I receive this money, these modest sums will find their way to the budget category “Extra money towards student loans.”

How lame am I? Being exceptionally lame, I did some math to find out exactly how lame I am. Over the next 5 years, my decision to use this money to pay off student loans will earn me $83.53 in interest. Now, admittedly $83.53 isn’t a lot of money. However, there is GREAT power in making these decisions consistently. Each time we make a small decision to reinvest the money we receive rather than spend it on whatever thing we see that we want, we are moving ourselves closer to reaching our financial goals, whether that be paying off student loans, a mortgage, credit card debt, or financial independence (really, these things are related and mastering each will improve your life dramatically).

But, what about our person who received $3,000 in the example above, what would happen if they invested their money? After five years they would be $1,252.88 closer to financial independence. That’s real money.

Being wise with windfalls has become a habit for us because we are not emotionally connected with our money.  Our happiness is not dependent upon money. We are not living in a state of “scarcity” common among people at all income levels. We have enough, so we are not constantly hoping for more money to purchase some new “thing.” That power over things will give you the ability to manage windfalls wisely.

In General Financial Advice

How much debt can you afford?

So, how much student loan debt can you afford?

Like any good question, the answer is: it depends.

How much student loan debt you can afford depends on how much money you can expect to earn upon graduation. How much money you can expect to earn upon graduation depends on three factors, in this order:

  • Major
  • Effort
  • Intelligence

“Wait,” you might be saying, “that’s it”?!?

Yep, that’s it.

“But I went to ______ (fill in the blank with Harvard, Stanford, or some uber hip west-coast liberal arts college that nobody’s ever heard of).” “You mean to tell me that my college choice won’t impact my income AT ALL”? “I spent like $300,000 on that degree”!

Sorry Lindsay Library and Sammy Science Lab, that’s exactly what I’m saying.

In the most important study of its kind, Dale and Krueger found that, when basic measures of intelligence were controlled for (using SAT scores, high school GPA, and the like), average salary is consistent regardless of college attended. This is true, not just a few months after graduation, but years later.

So, no. Your expensive undergraduate education didn’t buy you much more than if you had gone to a State School, or that school which offered you a huge scholarship but wasn’t quite cool enough, at half the price.

I know it hurts, but it’s the truth. I just hope, for your sake, that you didn’t get a liberal arts degree. Speaking of…

1. Major

Choice of major has, by far, the greatest impact on expected earning after graduation. If you want to earn a reasonable wage right out of undergrad, the word you need to know is ENGINEERING. With a degree in the broader field of engineering, you can expect to earn 50%-150% more upon graduation than your liberal arts counterparts (who are paying the same tuition as you).

If engineering isn’t your thing, get some type of business degree (like accounting, supply chain management, marketing, etc.). You’ll still earn a fair amount (33%-100% more than liberal arts majors), but with a slightly different brand of math and a bit more of a “softer side.”

If neither of those are your cup-of-tea, other options include: nursing (or other degrees in the medical field), and perhaps government or political affairs (depending on the market and your stomach for being a cog in the bureaucratic wheel).

If you want to earn $50,000 or more when you graduate, these are your options (and yes, I know I’m oversimplifying this, but blog posts are short and this is designed as a general guideline that is true a vast majority of the time).

You might be thinking “what about if I’m planning on going to grad school”? As I said before, plans can change. You can still go to grad school with a marketable degree. I knew plenty of people in law school who had engineering degrees. And, these people were actually more prepared for law school because their degree had taught them to challenge ideas, and provide more proofs and evidence, than my soft political science degree had.

If you must do something else because it is your “life’s passion” I suggest getting a double major.

Pair your music or theater degree with a marketable business degree. Pair your arts degree with engineering. Understand what skills are complimentary between your passion and something you can actually get paid for doing. Use your marketable degree to get your job, then use your passion to differentiate yourself within your chosen field, or just have fun on the side.

You’ll earn more, be more fulfilled, and be more successful if you do. This leads me to…

2. Effort

Regardless of what major you choose, you’ll have to work hard. Not just in school. Going to class should be a very small part of your college education (for some, it’s not a part of their education). You still need to get good grades, but you need to do more than that. Explore internships, go to career fairs, go to guest lectures, visit with companies that come to your campus, get to know the career counselors at your campus, set up informational interviews, study abroad, get a job!

In short, know your options and build your network.

All of these things impact your marketability when you graduate, thus impacting your ability to pay back your student loans.


3. Intelligence

I’m sorry to say it, but you’re kind of stuck with this one. Of course, you can always learn and expand your mind. But, some have an innate capacity to learn and understand certain subjects which is greater than others. Understand your limits and where your particular brand of intelligence will lead to the most success.

Explore what works for you.

Don’t have the stomach for blood or trauma? Maybe don’t go into nursing.

Not good with numbers? Engineering probably isn’t your thing.

Be honest with yourself. If you are you’ll be more successful.


That was nice and all, but weren’t you going to tell me how much debt I can afford?

Ok, ok. I will.

Here’s the formula and here are my assumptions. It’s important to note that this is the MAXIMUM DEBT ALLOWED. I’ll go into more detail in future posts about why even this much debt is a bad idea, and how you can avoid it.

Already have more student loan debt than the maximum allowed by my formula? Don’t worry, we’ll come up with a strategy for helping you climb your own personal debt mountain, conquering it like so many boot-and-khaki-short-clad hikers on a weekend excursion!

Warning! Boring math alert!!!

Your debt shouldn’t equal more than:

(Average starting salary * 80%) * 15% of your income * 10 years to repay your debt


First, you don’t want to be in student loan debt for more than 10 years. You just don’t. You’re well into adulthood after 10 years. Things happen, life accelerates. After 10 years you really should be well on your path to financial independence (more on financial independence in a future post). I recommend being able to pay off your debt in less than 5 years if at all possible. But, like I said, we’re going for the maximum allowed.

Second, you’ll be paying 15% of your income towards student loans at a minimum. Again, I would recommend you keep your spending as low as possible to increase this percentage as much as possible to pay off your loans as quickly as possible, but this is the percentage given by the federal government for income based repayment as your expected percentage of income towards loans, so I’ll go with that for now.

Finally, 80% of your field’s average expected starting salary. Why only 80%? Because you might not end up with the highest paying job in your field! Like I said earlier, plan for the worst and be pleasantly surprised if things work out better.

So, let’s say you’re getting a computer science degree. Your average expected starting salary is $71,200. 80% of that is $56,960. 15% of that is $8,544. Multiplied by 10 years is $85,440. That’s the maximum debt you’re allowed for one of the top paying undergraduate degrees.

Wait! I didn’t account for interest! I did, it just wasn’t necessary to spell it out. But, since you’re getting all nosy about it, let me tell you why interest doesn’t matter.

The second you leave school you’re going to refinance your debt at ~4.5%. Then, you’re going to increase your salary at that rate through your ingenuity, hard work and persistence (and inflation will help with the rest). Those numbers are close enough to washing out (and this is a simple enough exercise) that we’ll give you intelligent young people a pass for now (for those of you who REALLY want exact numbers, I’ll post a debt repayment calculator soon).

Now, let’s take a look at a degree in social work. Your average expected starting salary is $33,800. 80% of that is $27,040. 15% of that is $4,056. Multiplied by 10 years is $40,560. That’s the maximum debt your allowed for a lower paying undergraduate degree.

It’s important to remember that, during this repayment period, the lower on the earning scale you are, the more Spartan your living expenses are assumed to be. 15% of an engineer’s salary might not impact standard of living much, but 15% of a liberal arts major’s would drastically impact standard of living.

So, as you think about your education, remember not to get into more debt than your degree can sustain. Going into hundreds of thousands of dollars in debt for undergrad isn’t practicable, and it isn’t smart (regardless of what your SAT score may tell you). You can still go to an expensive school, but plan ahead. Gather all the scholarships you can. Save money beforehand. Work during school and summers. Live on nothing. It’s possible, but it does require creativity (though, not as much creativity as figuring out a way to live once you’re hundreds of thousands of dollars in debt making $35,000 a year!).

Next week: The anatomy of a budget.