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Money Management Basics, Part 2
Never overestimate your income or expect to land a high—paying job that's far above the national average. Along those same lines, you also should avoid a common mistake made by many recent college grads. Simply put: don't equate your gross income with your ability to pay various bills. Just because you're making $40,000 a year doesn't mean you'll be bringing home $40,000 annually. And it certainly doesn't mean you should go out and buy a $40,000 car!
The truth of the matter is that if you're grossing $40,000, you're in the 25 percent tax bracket, and so your net income—that is, your salary after federal, state, and Social Security taxes—will be about $30,000. Translation: every two weeks your paycheck will be roughly $1,154; every month you'll be taking home $2,308. In some areas, that $2,308 can go a long way, but in many parts of the country, you'll be pinched for cash—especially if you have a family.
Gross Annual Income
Minus Annual Taxes (25%)
Net Annual Income
Net Monthly Income
Notice that your $40,000 income produces an after—tax, or net, monthly salary of $2,308. But you'd have to actually earn a gross salary of $53,333 in order to net $40,000 annually, which leaves you with a take—home pay of $3,077 each month.
With these numbers in mind, take a look at this classic example of what happens with the typical college graduate who is fresh out of school. Assume this college grad is named Nadine Naive. Nadine thinks that because she landed a $40,000 a year job, she'll be able handle her bills with no problem.
What Nadine hasn't counted on, though, is that the apartment in the city in which she wants to live costs $1,000 a month—twice as much as she'd planned on spending for housing. Nadine's new job as a marketing specialist requires her to meet with clients and take part in high—level meetings with senior executives. So needless to say, Nadine wants to "look the part." There goes $300 a month on clothes to get the wardrobe started. She has to get to work, of course, so Nadine has a used vehicle, with a modest $200 a month payment.
Because Nadine is now on her own and no longer living with her parents, car insurance is a new expense she also must tackle. That's a $150 a month hit to her wallet. Throw in another $100 a month for gas, tolls, and commuting expenses, along with maintenance costs for automobile oil changes and the like. Did I mention that Nadine has student loans? Those are $150 a month. Credit card bills from debts she ran up in school are another $200 each month. As tight as things are, we don't think Nadine will starve herself, so we'll assume she's eating some food; groceries and eating out costs $300 a month.
You may have noticed by now that Nadine Naive is actually spending more than she makes. On these "basics" alone, she's spending $2,400 a month (and she's only bringing home $2,308 each month)! We haven't even talked about how Nadine will furnish her apartment or pay for utilities like gas, water, and electric service, her cell phone bill, Internet service, or cable TV—let alone indulge in a few luxuries like trips to the nail and hair salon.
The lesson here is that almost everyone underestimates the true cost of living—not to mention setting aside money to achieve future—oriented goals. Without a true handle on your actual or expected living costs—a budget—you'll always be spending more than you make and you'll never get ahead financially, which leads to the next lesson.
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I was about two months away from graduation when I decided to look into consolidation. I called EdFed to see if they could get me started. I was surprised when they told me they would hold my application until my grace period was over, so I wouldn't have to make payments until 6 months after I graduated. Thanks EdFed. - Analee L. Fort Collins, TX
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