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James Lowell
interviewed by Brian Hecht on December 15, 1995
"The less you owe someone else, the more free you are to be yourself."
James Lowell is the author of "How to Survive in the Real World: Financial Independence for Recent Graduate."
Tripod: In recent years, college grads have often been portrayed as financially inept and debt-ridden. Is there any truth in this portrayal?
JL: Well, I think the answer is two-fold. The truth is that college grads come out of the cocoon of the campus much more debt ridden than the generation before them. That's thanks, not simply to the advent of student of loans, but also to the advent of credit cards within their first year of attending school and, typically, the misuse of them. Because they're not educated in any way, shape, or form as to exactly what a credit card is and why it can act like an albatross around their necks.
Tripod: What do you think constitutes responsible credit card behavior?
JL: I think there are three things. One, not owning more than one credit card. Two, not letting the balance of the card exceed your ability to pay it off on a monthly basis. And three, not using as a supplement to your income. In other words, using it as a way to purchase more than your means can allow you to afford.
Tripod: That sounds like the exact reason many people do use them.
JL: As a matter of fact, this isn't just restricted to Gen X. Everyone is using credit cards as a way to increase their "income."
Tripod: On the other hand, lots of graduates come out of school and they seem obsessed with developing a good credit rating. Is that really so important?
JL: A good credit rating is essential. It's basically a real world grade report. And if you don't have at least a solid A-minus average, you're going to find it very difficult when it comes time to borrow substantial sums of money, be it for a car or even for further education. Of course, you'll find it less difficult as a recent grad to be able to purchase one very large ticket item, and that's a car. One of the things that I think recent grads often get themselves in the most trouble with is the purchase of a car almost straight out of school, even before they know where they're going to work of live, or the accessibility of public transportation, and all of those things you need to bring into the quotient of purchasing a car. Because the temptation is so great and the deals seem, obviously, quite sweet.
Tripod: Your book covers a broad range of financial issues. If you could sum up your philosophy, your advice, in a few sentences, what would they be?
JL: I have what I call my "money mantra," and that is "The less you owe someone else, the more free you are to be yourself." Basically what that means is that I consider a life worth living a life that is self-determined, free from obligations to others, and one that enables you to pursue your own short-, intermediate-, and long-term goals to the fullest extent of your abilities. As opposed to being hamstrung by a debt that will keep you physically at a job that you no longer like and that no longer is helping you develop your saleable skills. And building up those saleable skills is basically what the first decade of life is all about.
Tripod: That's sounds like a pretty comprehensive world view. Let's apply it to something specific. I know that a lot of recent grads are discouraged from smart money management because they feel completely overwhelmed by student loans. How would you help these people apply your philosophy to thinking about that kind of debt?
JL: Student loans are a great example of a very lenient form of debt. There are many ways to repay a student loan, and in most other loan situations, you're not given the leeway to either pay interest only on the loan for up to a year, or to consolidate several of the loans into one with a slightly higher rate. So there are many ways that you can, overnight, figure out the best strategy for you to pay your student loans on a timely basis -- and a way that won't necessarily cut into you lifestyle. Clearly, when you're just starting out, you don't have a lot of money. A student loan -- typically, a $12,000 loan or so -- will run you about $150 to $200 a month. That's a sizable chunk of change, especially if what you're trying to do is move beyond the environs of your family's home and establish an independent living for yourself
You need to create a real-world reality check for yourself, which is called creating your net worth -- it's very simple to do -- on one piece of paper you just draw a line down the middle and on one side write "income" and on the other side write "owe." Chances are at the bottom, you'll find a negative and that means that you need to throw yourselves back into your financial framework and figure out a budget you can live with and that allows you to pay off your debts on a timely basis. The less debt you have, the easier it will be to enjoy the income that you're making.
Tripod: Let's talk about some common strategies for reducing expenses especially in the first years out of college. Should people be cutting back entertainment? Getting a less expensive apartment?
JL: I think there are several ways to do it. You've mentioned entertainment and apartment living, so I'll deal with those two first. When it comes to entertainment, I think one of the things that we very rarely do is add up the total cost of how we entertain ourselves. By that I mean everything from cable TV -- if you watch MTV, well, it costs big time. If you just see three videos a week, well that's almost twelve dollars a week right there. You do the math. Twelve dollars a week times fifty-two weeks is going to bring you to over $600. If you are living in an apartment -- if it's a studio, you're paying for it yourself and you find it very difficult to meet that expense, you could certainly try to share the cost of an apartment with others. The book has a very detailed subsection on some of the best strategies for dealing with a shared living arrangement because, of course, your dealing with not only financial but also psychological hurdles in that particular relationship.
But I think even more so, if you do find yourself holding more than one credit card, it behooves you to pick out the one that has the lowest rate of interest and to try and collapse the balance of the higher-rate interest debt into the one with the lower rate and then pay it off. Figure out a strategy that enables you to do so. It's going to take some time. Time is always a painful reminder of just how deep a whole you've dug, but you need to be able to face the reality of your financial situation today so that you can overcome it and actually enjoy some of the advantages of what is not exactly a fun thing -- mainly, working in the real world.
You also need to be very focused on items that are awfully easy to overlook. Everything from laundry -- that's going to cost you every week -- even your telephone. Most people don't even think twice when they start living in an apartment about the cost of getting a phone hooked up. Well, in many states that can cost you over $100 just to have the phone plugged in for you. And then as soon as you start speaking into it, that adds another layer of expense.
Tripod: So you're suggesting a reality check. Not to sugar-coat these expenses, but to look at them for what they are ...
JL: Aboslutely. You need to pull them apart and you need to figure out exactly what your basic costs are before you do things like go to Filene's Basement and start purchasing suits on sale. It's very important to remind yourself that just because an item is on sale, doesn't mean you're not spending money. A big mistake that recent grads make -- and they're not the only ones -- they go to a store like a Filene's or a Macy's and they get a store charge card, and they charge clothing that may be on sale for 15 to 20 percent off, but then they don't pay off the balance of their charge. That's 15 to 20 percent on the money that they've just borrowed on the store card. Well, obviously, at the end of the day, that's not a good balance sheet.
Tripod: That cancels the sale out. Let's talk about investing. You edit a mutual fund newsletter. Lots of funds now have low minimum investments -- are people taking advantage of these new opportunities to invest?
JL: In some sense, surprisingly, the answer is yes. And the reason for the response is that many Gen-Xers are using their 401(k) plans they find at work as a way to begin to invest for their long-term financial security. They're also much more aware, I think, of the benefits of being able to invest for themselves. Many of the mutual funds which have low minimums do enable you to -- virtually overnight -- create a fairly well diversified portfolio of stocks.
Tripod: Any specific fund picks for beginning investors?
JL: One of the things to do is look at funds that have an automatic withdrawal plan available -- which basically means that you set an amount to be withdrawn from your checking account and they'll automatically invest it in the fund. I would think that the majority of the larger fund families have those opportunities available for the younger invesors.
You can email Jim Lowell at [email protected]
Interested in digging your way out of debt, saving money, investing, or saving for the future? Tripod's the place to start -- check out:
Tripod Guide to Mutual Funds: So you've saved some money. Now what do you do with it?
Like Money in the Bank: Who says you've got to settle for a stodgy old savings account? Check out your options.
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