10 Things Every College Grad Needs To Know About Money

7/01/2013 @ 10:20AM |Susan Adams, Forbes Staff

Mary Morrison, who has taught a personal finance class to Stanford University seniors for 15 years, has seen the depths of college students’ ignorance about personal finances. There was the young woman who thought “paid vacation” meant that her boss would pay for all her travel and leisure activities, the guy who didn’t know there was such a thing as a water bill, and the student who threatened to call the police and report the work study office because it was letting the government withhold money from her paycheck.

Some students, who call Morrison “the reality check lady,” have suggested she write a book detailing everything you need to know about money when you get out of college. She hasn’t done that, partly because she is busy in her job as director of funds management in Stanford’s financial aid office, but she shared with Forbes what she thinks are the most important tips of all. Here are her tips:

Don’t make career decisions based on dollar amounts.

Think big picture. “If you’re offered X dollars in New York City, it’s not the same as the same amount in Kansas City. You have to evaluate what you want out of your career and what the benefits are of those decisions,” says Morrison. When evaluating job offers, know the difference between benefits and perks. “You might think it’s cool to be able to throw a Frisbee down the hall, but what’s that compared with dental insurance?” she asks.

Figure out how much you will need up front to move and start your life.

Apartment rentals require deposits, as do some utility companies. You may need a moving van, and you may have to wait four weeks for a first paycheck. “You have to figure out what you’ll need to live on before that first paycheck,” Morrison says. “Few people’s parents can write them a check for $3,000.”

Know what your take-home pay is–it’s not as much as you think.

This starts with filling out your W-4 tax withholding form correctly and getting the right amount of tax taken out of your paycheck. You can’t start fashioning a budget without knowing what you have to work with. “A paycheck and the dollars into your hand are not the same thing,” Morrison says. “You and the married guy next door with three kids will not get the same check for the same salary.”

Be realistic about your expenses and essentials.

“Some students have lived in an apartment before, but after college it’s not a big party and eating your roommates’ food late at night,” Morrison says. Rather it’s time to grapple with expenses like transportation, health care, food, entertainment and incidentals. Plan everything. Many students expect to live on $50 a week for food, so Morrison brings to class an unappetizing selection of $50 worth of groceries to show them what that money will buy. “You will not live on rice and beans. You will go to the deli. You will buy coffee,” she says. You don’t have to deprive yourself. Just be realistic. “I don’t care if they get a pet snake,” Morrison says. “Just know how much it costs.”

Understand cash flow.

Find out not only exactly how much you’ll be paid, but also precisely when, and when your bills will arrive.

Keep an emergency account.

Bad things happen, and they will happen to you. “You’ll be sick. You’ll be hurt. Life will happen to you the same ways it does to everyone else,” Morrison says. Be prepared mentally and financially for this reality.

Know when to use a debit card or credit card.

“I think students should have credit cards,” Morrison says. “They are safer from theft than debit cards, and paying off a credit card every month will help a young person build a credit history and, hopefully, a good credit score.” However, for routine purchases like going out to eat, buying gasoline or going to a movie, students should use a debit card, she advises. “It will protect them from the typical ‘I spent how much this month?’ experience. Credit cards should be for major, hopefully planned, significant purchases.”

Get renter’s insurance.

Look carefully at the insurance options provided by your employer. For example, everyone needs worker’s compensation insurance. Never drive with minimum liability auto insurance. Financially protect yourself from a “roommate who might run off to Puerto Rico,” as Morrison puts it, with a security deposit or legal agreement.

Begin contributing immediately to a 401(k) plan or an IRA account.

“Even if you start off slow and modest, it will make a huge difference,” Morrison says. You may miss the $50 or so you put aside out of each paycheck, but it will grow and grow and save you from panic later.

Don’t be afraid to invest.

“I tell them that a savings account is a risky investment, because it means you’re betting that there won’t be inflation,” Morrison says. Diversify, diversify, diversify.

“Some people come in knowing nothing,” she says. “They really are a deer in the headlights.” The 200 or so students she gets her hands on each year receive a dose of tough love and honesty. Morrison says they have called the experience “funny and horrifying at the same time.”

Source: Forbes

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