Healthy, Wealthy, and Wise

Own your money; don’t let it own you.

By Laura Fayer and Kathryn Weinmann

Real talk: We are about to graduate from Stanford Business School and go on to manage investments, portfolios, P&Ls, and perhaps even real human beings — yet would you say you’re confident in managing your own personal finances? Most people we’ve talked to could use help building financial security for the long haul (ourselves included).

You’ve invested a ton in yourself to get this far, and we want to make sure you get a killer ROI. Fortunately, there are a ton of resources that can support us during this transition. To make life easy, we’ve compiled our favorites below.

Heavy hitter topics for graduating MBA students:

1. Defining Financial Health
2. Asset Allocation
3. Budgeting
4. Student Loans
5. Home-Ownership

Feel free to read what is relevant or come back to this at a later point in time. We’ve included some bonus tips at the end on taxes, particularly for you MBA1 and MSx readers out there. Turns out there is a silver lining of your lack-of-income in this 2018 tax year.

Disclaimer: We are decidedly not professional financial advisors. We are just nerds interested in financial security and hope to share the wealth. These resources are meant to be a starting point for you to think about important topics, but they are by no means complete. Additionally, we feel it is important to note that Kathryn worked at NerdWallet before school and Laura did an internship at SoFi over the summer, but our commentary is solely our own. We’ve provided here our favorite tools, but we encourage you to take what you like and challenge what you don’t. Wishing you all a prosperous financial future!

Defining Financial Health

Understand Where You Are Today

It can be hard to know what “managing your personal finances” really means. What does success look like? In short, we want you to be able to sleep well at night knowing you’ve made thoughtful decisions about how you spend, save, and invest your money.

There are a number of financial health tools that can serve as a check-up on where you are today. A couple that we like are: NerdWallet’s Financial Well-Being Score developed by the Consumer Finance Protection Bureau and The New York Times article on How to Self-Diagnose Your Financial Health. And remember, just like you assess your physical health on a regular basis, be sure to check in on your financial health as major life events can significantly alter how you approach your goals.

Hierarchy of Financial Needs

As people with finite income (sigh), it can be difficult to know where to start. Should I get insurance before saving? Should I rely on credit in order to invest? While every person’s situation is unique, we have found it helpful to reference the Hierarchy of Financial Needs. This framework mirrors Maslow’s Hierarchy of Needs and was created by José Quiñonez, a pioneer in financial health and founder of fintech non-profit Mission Asset Fund (MAF). We’ve put an overview below, and you can find his full paper here.

José Quiñonez’s Hierarchy of Financial Needs: https://missionassetfund.org/hierarchy-financial-needs-introduction/

Components of Hierarchy of Financial Needs Overview:

1. Income: This one is pretty straightforward, but it takes money to make money :) Good luck on the job hunt…may the odds ever be in our favor. Ok, but actually, one thing to note is that income is not always consistent, so it is important to make spending decisions that allow you to live well within your means and, when appropriate, seek out financial products that allow you to smooth your ability to consume over time. More on that below.

2. Insurance: It is important to secure the assets you care about through insurance so that an unexpected event does not have a catastrophic impact on your financial well-being. For many of us, that will include health insurance (your #1 asset is you!), car insurance (If you don’t own a car, consider switching to non-owner car insurance as a less expensive option), renters insurance and personal item insurance for things like your phone and computer (check out Lemonade, a company disrupting the insurance market). Additional insurance needs will vary based on your personal situation. For example, life insurance is usually recommended when someone depends on your income (e.g. small children, spouse). There are more complex uses of life insurance as well, but those cases are less common. To learn more, click here.

4. Credit: It may surprise you that credit comes before savings, but in our current financial system, a credit history is an important prerequisite for many large purchases, which can be tough to access without low-cost credit. Shout-out to the international students for managing this craziness over the past two years. Of course, it is important to differentiate between a responsible use of credit and a growing debt balance. We recommend getting a low or no-fee credit card and paying the balance in full every month to boost up your credit. To find the credit card right for you, check out NerdWallet’s free tool. Also credit cards = points, which can mean cashback, free flights, hotels, etc. To find a card that can you get that free trip to Bali or cash in your wallet, check out The Points Guy.

5. Savings: This is the first step that allows you to build wealth over time. A quick rule of thumb is that ideally 20% of your pre-tax income (at least) should go to savings each month. To walk through a more detailed (and quite useful) thought process, check out this article.

6. Investing: Welcome to self-actualization! Well, in the financial sense, sort of…investing allows your money to work for you. It can provide passive income streams and help you save for retirement. More on this below.

Asset Allocation

This is a fancy phrase for how much money you put in different categories of investment, including cash reserves in a savings account or money market fund. Since most of us are relatively young and planning for the long term, many of us will pay off loans, put some cash aside for a rainy day fund, and invest the rest.

To our female readers: Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” The “he” paying for it, is actually a “she,” and we need to lead the change in breaking the trends in female investing. Seriously though, if not us, then who? Hopefully the info. below provides some nudges to get the compound interest ball a rollin’.

So how do I even get started? The amount of cash that you set aside in a checking/savings account should be enough to make you feel prepared to cover any interruptions to your income or unexpected expenses. Many resources suggest 3–6 months of your income, but of course it’s up to you. The precise number is less important than the overall process of 1) building up savings and then 2) investing excess savings so that they can grow over time.

Unfortunately, many millennials are leaving a large portion or all of their savings in cash, which means that their savings may actually be worth less each day as the interest rate on savings accounts (anywhere from 0.01% to just below 2%) is below inflation (2.1% last year). So while you definitely want to have a rainy day fund, it is important to be aware of the implications of leaving cash in a savings account.

Further, those who are waiting to invest miss out on the beauty of compound interest. In case you want a refresher on (or are just mesmerized by) compound interest, check out this calculator. Say you’re 25 (if only we were) and decided to take the slightly-less-nice apartment and instead invest the $200 saved per month. Assuming at 6.6% rate of return (the historical long term average), over 20 years you will have nearly $100,000 (technically $99,269) — over half of which is from interest. But if you start saving at age 30, only 5 years later, when you’re 45 you will only have ~$61k. That’s 40% less ($38k less) due to just 5 years of savings ($12k in principle savings and $26k from compounding gains). Turns out how much you have to invest each month hugely depends on when you start.

Ok, so hopefully we’ve sold you on why investing early and often is important. Here are some ways you can start:

1. Retirement Benefits: If your employer has retirement benefits like 401(k) matching, take advantage. Matching is free money — contribute up to the limit if you are able to do so. For our entrepreneurs making the Stanford family proud, you, too, have retirement options: Click here and here to learn more.
2. Do It Yourself: Throwback to Foundations Finance (apologies if this triggers negative emotions and flooding, that’s not our intent) to recall the pros and cons of investing in individual stocks vs. (passively managed) ETFs that represent the broader market. More here on pros and cons. If this path feels right for you, you can get started with providers like Ally, TD Ameritrade, and Robinhood. See a comprehensive list of brokerage account providers here from Motley Fool.
3. Robo and Online Advisors: There are a lot of options out there these days, including Wealthfront, SoFi Wealth, Betterment, Personal Capital, Charles Schwab, Grove, etc. Here is a tool that can help you pick the one best for you, the most important thing however is simply to start. Robo-advisors are not without risk, and we want to be sure you make an educated risk if you do decide to trust your money with a Robo-advisor.
4. Alternative asset allocation companies: There are a handful of interesting tech companies democratizing investment opportunities. To name a few, Ellevest is also an online personal asset management platform and is created by and made for women. It offers similar asset management products as the ones above, but also has tailored content and social impact portfolios for the more socially conscious investor. Yield Street has opened up the world of investing that was previously only available to institutional investors like hedge funds and family offices.
5. Actively Managed Funds: You can also invest in actively managed funds through mutual funds, banks or by hiring a personal financial planner. Of course, always be aware (beware?) of fees.

What about investing in companies and entrepreneurs? Given that so many of us will live in hotbeds of entrepreneurial activity, it is likely that you will be tempted to invest in hot young startup that are“gonna be huge” or a genius friend’s crypto fund. More power to you. We are certainly grateful for the opportunity to invest in some of the most talented and amazing people we know. But even the best VCs have a portfolio, and given your fund size is likely a bit smaller than theirs, your ability to diversify is limited. So we recommend framing these early stage bets for what they are — moonshots. While the upside may be fanta$tic, that outcome is a long shot. While you should be thoughtful about who and what you invest in, from a budgeting perspective, view these bets as consumption spending. You are buying the potential for upside, but any given investment is unlikely to change your financial position meaningfully, and you may not recoup your initial investment.

Budgeting

The idea of budgeting makes many people squirm in their seats, so we’ll keep it simple. A budget doesn’t have to be a burden — in fact, a budget can provide tremendous freedom. We just want you to be intentional about however you choose to spend your money.

Financial advice author Dave Ramsey sums it up nicely: “A budget is telling your money where to go instead of wondering where it went.”

After all, that MBA lifestyle adds up between student loans, weddings, mortgages, kids, and an affinity for traveling to exotic places with 18 of your closest friends. The bottom line (see what we did there?) is: know your after-tax income, fixed and variable expenses, and set savings goals.

There are many tools out there that can help you with budgeting, here are some free (yup, no interest on these bad boys) to name a few:

1. Excel Templates are available from a variety of sources that you can download, or put your DeMarzo modeling skills to the test and see what you can design for yourself.
2. Personal Capital is a free dashboard to track your net worth and investment goals. As with many of the online budgeting tools, you need to provide your financial account information in order to make this worth your while.
3. Mint offers web and mobile apps that similarly plug directly into most US banks and investment platforms to capture your ca$h. They will also send you notifications on your spending habits. It can be a bit much if we are being honest, but it’s a great way to get started.

Loans

Turns out the quarterly deposit into your account is not monopoly money and does in fact need to be paid back… from your paycheck. Reality may have set in when you went to the Financial Aid Exit Counseling session, which provided a good overview of repayment options for Stanford GSB students. However, in case Foundations Finance is a distant memory, we’ve provided a cheat sheet and some food for thought on how to deal with your repayment.

Great News: If you took out a student loan, you do not need to start repaying this loan until 6 months after graduation.

Pro Tip: Pay off accrued interest before entering repayment. Unsubsidized and private student loans are a specific type of loan where you do not need to make payments while you are in school, BUT interest has been accruing on these loans since disbursement (fancy word for: since the cash paid your school bills or hit your bank account).

What you want to avoid is interest capitalization: at the end of your deferment period (6 months post graduation), your interest gets added to the loan balance and the lender then charges you interest on your interest, causing your loan balance to grow even faster (yuck). Regardless of whether or not you refinance, you should pay off accrued interest BEFORE you enter into repayment. For a full explanation, check out what Miss Sallie Mae has to say.

How do I avoid this devilish interest capitalization? If you can afford to, we recommend paying off your accrued interest before you enter repayment, which may mean dedicating part of your signing bonus or skipping the the month long Euro trip, but it will save you money in the long run. When you make a payment, be sure to communicate with your loan provider that you want to pay off the accrued interest rather than interest + principal. Most loan providers allow you to specify, but you might want to get on the phone just in case you are a little bit neurotic, like we are.

Student Loan FAQ: A lot of our friends ask us the following questions, many of which center around the decision to refinance. Again, we’re not professional financial advice givers but did want to share the frameworks and resources we use.

Should I refinance my loans? We cannot answer this with a blanket yes, but it is highly encouraged that you consider refinancing your loans as a Stanford MBA student. The key reason is that you can (most likely) get a lower interest rate on your loans, which means ca$h for you. The biggest con is that you lose the Federal Student Loan benefits like 1) tying your monthly payment amount to your income (i.e., ability to pay) and 2) Federal loan forgiveness for those working in the non-profit sector (although Congress may get rid of this altogether, which is a whole other topic of conversation). However, since you are a GSB student you can still refinance with a private loan provider and receive loan forgiveness if you work in the nonprofit sector under much better terms than the federal forgiveness program, so yay to our generous donors.

Where do I refinance? For US citizens and residents you have many options: SoFi, Common Bond, First Republic, etc. International students: your best bet is Prodigy. We wish there were more options for you, but this is still helpful to keep in mind in case your visa/residency status changes. A full list of options from the GSB website can be found here.

When should I refinance? That’s up to you, but remember our caveat on accrued interest. You can do this as soon as you graduate, but as soon as you refinance you will owe your full payments, meaning you give up your 6 month student-no-payments-required grace period and accrued interest will capitalize. However, as we discuss below, you could decide to refinance earlier depending on your assumptions about changing interest rates. Bringing us to the next question…

Should I choose fixed or variable rates? Fixed rate means the rate will not change over the life of the loan and is typically higher than a variable rate. Variable rates change along with changes in the market interest rate. Interest rates are on the rise and predicted to continue to do so throughout 2020, which means it may be beneficial (if you can afford it) to lock in a lower fixed rate by refinancing after graduation as opposed to waiting until your grace period is over in January. On the other hand, if you have a less rosy view of future economic performance or plan to pay off your loans quickly, variable rates benefit you because you can pay off your loans while rates are still relatively low. Just to reiterate, this is not advice, do your own research and make your own decision.

How do I select a provider? There are many ways to think about this and the most obvious is go with the best rate you can get. However, there are other considerations and perks that companies offer like career coaching, auto-debit payments and potentially other bundled deals. You can also *try* to shop around your rates by directly calling the provider and put those Maggie Neal negotiating skills to the test.

Any other tips? Why, we never thought you’d ask!

1. If you are applying with multiple loan providers or refinance-rs, apply within a few days (ideally same day) to avoid multiple dings to your credit score. Every time you apply for a loan — credit card, mortgage, student loan, etc. — your credit score goes down a little. It’s lame, but so be it.
2. Enroll in auto-pay: It can save you 0.25% and will be much less of a headache!

What if I don’t have a good credit score? To be blunt, credit score matters. However, the algorithms for the newer-tech-savvy refinancing companies like SoFi and Commonbond do take into account things other than just your credit score. However, if you are looking for a credit score boost, here are some tips.

What is the trade-off between paying off loans and accumulating wealth through investing? There are both economic and emotional trade-offs, but ultimately it’s a call you need to make. Do you think you can make more in the market (after taxes!) over the term of your loan than you would paying off the loan earlier? Ellevest suggests if you can get a loan rate of lower than 4% it is worth investing your excess cash instead of using it to pay down your student loans sooner. Again, your psyche matters. If paying off your loans will set you free, then fly baby fly.

Lastly, what about taxes? Interest on student loans is tax deductible up to $2,500/year for individuals. Here is more information to help you with this come April (or July if you got an extension on your taxes).

Home-Ownership

The glory of graduating means no more Ponzi-scheme-like passdown fees; the not-so-glorious part is that, for many of us, housing will be our largest expense. Post-GSB is the first time in a while we are settling down — even if that only means staying a few years in a city. But that relative stability leaves many of us wondering if now is the time for us to buy a home. After all, there’s this historical narrative (and policy incentive structure) that’s hard to escape — buying a house is a part of The American Dream. It’s what adults do, right?

Well, millennials defer home buying for a number of reasons. Contrary to popular belief, many of us actually do want to buy, eventually. To help you make that decision, we like this this tool from the New York Times.

When you are ready to buy, it can be hard to know what you can reasonably afford. NerdWallet created this tool to help prospective homebuyers focus their search by taking into account your monthly net income (net of expenses), available funds for down payment and closing costs, and your credit profile. They also provide more detail on the total costs involved to buy a home, which surprise many people since closing costs often tack on an additional 2–5% of the price of the home.

Bonus Tips on Taxes

MBA1s, you should read this!

For those of us lucky enough to take Lisa De Simone’s Individual Taxes & Financial Planning course this Spring Quarter, this is a quick refresher on a few topics. MBA1s, take this class. There is A LOT to fit in to this section and we strongly recommend you ask a friend for the content from Lisa’s class or get her to do a brown bag presentation if you want more. Here are some hot button items that you should know as an MBA student.

Tax deductions for MBAs: You may be eligible to write-off your MBA tuition for 2016 & 2017 and here is a guide from Visor on how to do so. Unfortunately, this is no longer the case for 2018 due to the changes in the tax code. More here.

No Income? No problem: This lovely time in school with little-to-no income has tax advantages. Consider the following while you’re in a lower tax bracket:

• Roll over your traditional 401(k) from your former employer or IRA (Individual Retirement Account) into a Roth account, which has different tax treatment. Roth 401(k)s/IRAs are taxed now when you put money in, but you can then withdraw in retirement tax-free. Traditional 401ks/IRAs reduce your taxable income when you put money in but will be taxed when you take it out upon retirement. Deciding whether you want your savings in a traditional or Roth account therefore comes down to one question: Is your tax rate higher now or when you retire? With next to no income, it’s hard to envision a time when your rate would be lower, which is why it may be beneficial to put money in a Roth now. Still confused? For more info on this, click here.
• Contribute to a Roth IRA or Roth 401(k) (most likely an IRA since you are not employed). You can contribute up to $5,500 directly to either account assuming you have at least that much in earned income during the year or tucked away in another savings vehicle.
• Consider contributing through a Backdoor Roth IRA: Honestly this sounds shady. Who is Roth? Why does he need to take the backdoor? It is a real option when it comes to retirement savings, although it may not be around forever. If you are intrigued (and you probably should be) by this fairy-like tax-preferred retirement account, consider looking into the backdoor Roth. In short, it allows you to contribute more money to a Roth IRA by first investing in a traditional IRA and then transferring it into a Roth. For more background and how to do it look here. The process should be the same for most institutions. And here is how to deal with a backdoor Roth on your tax return.
• Recognize long term capital gains (investments held for longer than 1 year) in 2018. Capital gains income below $38,600 and $77,200 for single and joint filers will be federally taxed at 0%. Beyond that amount a capital gains rate will kick in. Check out the tax bracket details here. To elaborate, let’s say you as an individual have $21k in ordinary income (internship salary or contractor income). With a 12k standard deduction, your $9k of taxable income gets taxed at 10%. Any long term capital gains up to $29.6k ($38.6k -$9k= 29.6k) will be taxed at 0%. That’s up to $4,440 of additional mula in your pocket. You’re welcome!
• Consider deferred bonus payout: For MBA2s and MSx-ers, consider negotiating your bonus payout to fall on January 1, 2019 because it may benefit you by keeping you in a lower tax bracket in 2018 (see bracket details above).

In Closing

We know this topic can be stressful, and it’s often easier to ignore than engage. But it doesn’t have to be that way. Rest assured that you have these resources (and us!) to come back to. We care deeply about enabling people to make the best financial decisions possible, which is why we wrote this piece. We hope these resources will empower you to take control of your financial future. So get all the questionable decision-making out of your system during Dis-O week, and then go forth and prosper by making well-informed, strategic financial decisions that will help you build the life you want.

Hungry for More?

Here are some great, additional resources we like for financial planning:

• Motley Fool: One-stop shop for financial planning, home buying, stock picking and much more. For a comprehensive casual read, check out their Financial Planning Book. Love podcasts? Us too, and perhaps this will become valuable on your commute.
• For our female focused investors or soon to be investors, Ellevest has a great “What the Elle” newsletter you can subscribe to for curated content and advice.
• New York Times “Your Money” articles — interesting reads for a wide variety of audiences, interests, and needs.