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Getting Real

A dose of real life before you graduate

By Jonie Watanabe Tsuji

Ah yes, the beginning of your senior year. You have magical thoughts of what you are going to do after you graduate: Get a job paying a minimum of $60K, buy yourself that BMW 135i you've been drooling over, and have enough money left over to put a down payment on a nice condo (or at least rent one) in a sweet area. Sorry to burst your dream bubble, but it's time to get real!

Deduction Junction

How about we start with that big paycheck you're going to be getting. Just a little secret, a $60K paycheck isn't as big as you think it is. There are a lot of items called deductions that get taken from your paycheck—$60K is just your gross pay. Some of you have had part-time jobs, and you think you know all there is to know about net pay vs. gross pay. However, the cold reality is, the more money you earn (and because this will be a full-time job vs. a part-time), the more that gets taken out. There's federal income tax, Medicare, social security, state disability tax, state income tax, and medical insurance. Those are the standard deductions.

Photo credit: BdwayDiva1

Photo credit: BdwayDiva1

You can also elect to have several other deductions: health and dependent care spending accounts, long-term disability, and supplemental life insurance. These deductions can be quite helpful. If you want to get that LASIK surgery, use your health care spending account; and when you have dependents (kids!) you will need childcare hence, a dependent care spending account. These spending accounts require you to take out a little extra money from your paycheck (tax free). You should always consider long-term disability since you are more likely to get injured than die. The supplemental life insurance would be over and above what your employer offers standard. All of those deductions (standard and elective) add up to take away about 30% (or more) of your paycheck.

All the Right Moves

OK, about that new'll probably need at least first and last month's rent, perhaps an additional security deposit and, of course, the monthly cost. You can lower the amount of money coming out of your pocket if you get some roommates to help share the rent and expenses (electricity, phone, etc.). You may have thought you were over that by getting a real job, but it is a good way to save up some money to ultimately buy yourself a piece of property. Also, don't forget to get renter's insurance to protect your valuables if there is ever a tragedy. Your landlord has property insurance that only protects the actual dwelling in which you live, not your items in it.

Once you have saved up some money, your next step may be to buy a house/condo/townhouse. The math (and the process) is a whole lot more complicated than renting. When you buy a house, you need to come up with a down payment—preferably at least 20% or more. If you can't put down 20%, you may have to pay for private mortgage insurance (PMI). This is money you pay as insurance to the lender to protect them from you defaulting (not paying) the loan. The rest is financed with a loan (mortgage). A mortgage is borrowing money—you will have to pay back the amount you borrowed plus interest. There are different types of mortgages: fixed-rate mortgages, adjustable-rate mortgages, and hybrid mortgages. Finally, you will have to pay closing costs (fees you have to pay for the transaction itself-appraisal fee, inspections, application fees, etc.) On top of it all, you'll need home insurance to protect your investment. And don't forget about property taxes, which, depending on where you live, can be thousands of dollars per year.

Payback Time

Ok, paycheck and living arrangements aside, how do you start paying off that huge student loan you have? Student loans are considered "good debt." Good debt is any debt that you can take as a tax write-off. What does this mean? When you get a student loan, like a mortgage, you are paying back money borrowed plus interest. It is the interest that you can write off. The exception would be if you are single and make more than $50K, in which case you don't qualify for a tax break. So if you do get that job paying $60K, you won't be eligible. Sorry.

As stressed as you may be about paying it back, know that taking out a loan to attend college was worth it. Yes, that Psych 101 class will pay off in the long run. A bachelor's degree will earn you about twice as much as a high-school diploma. So how do you pay off the loan? If you have a Federal Stafford loan and the interest rate is not fixed, consider consolidating it at the lowest rate available. How long should you take to pay it off? Pay it off as quickly as you can! Remember, you are paying back the principal (your tuition) plus interest. The quicker you pay it off, the less "extra" money (interest). However, if the amount you would need to pay for a five-year term is too high for you, you'll have to consider a longer term. Whichever term you decide, never default (don't pay back) on your loan. If you ever want to buy that BMW or condo, you're going to need good credit.

Cut and Run

"Forget it; I'll just go to grad school."

"I'm going back to live with my parents."

These choices are certainly not uncommon. But are they really valid options? Grad school is a bad choice just to delay entering the "real world." Living with the parents might not be a bad idea to save up some money...if in fact you DO save the money. Just make a plan of how long you will do this and stick to it! You and your parents will be glad you did. With a little smart planning, you can save up some money, find a good place to live, and eventually get some of those big toys you're dreaming about. Just know it won't happen overnight—give yourself a few years, it will be worth the wait!

Jonie Watanabe Tsuji is a career counselor and career fair coordinator at the California Institute of Technology in Pasadena.

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