3 Things Top-Tier Law Students Get Wrong About Money

I spoke with a financial aid officer at a top-ten law school a few months ago and wrote a piece for the SALT blog about it. It’s a basic description of common financial mistakes and ways to avoid them.

1. They Don’t Read Contracts Before Signing Them
Yes, even while passing their contracts courses, they sign things without reading them. One student came in to financial aid to ask for extra money because she hadn’t paid her electric bill all year—and owed $4,000.

Her lease specified that electricity was her responsibility, but she hadn’t read the lease, and her landlord hadn’t told her. Others sign important documents and then don’t keep copies, or don’t file them somewhere organized enough to find them again later.

How You Can Be Smarter

Double-check. Ask questions. Get answers in writing. Read documents before you file them away.

And get a file cabinet or at least a box with some folders in it. You may live in a digital era, but some paper documents you need to be able to find without Google.

2. They Don’t Match Their Spending To Their Income

Students who go straight from undergraduate life to law school are making all the same mistakes of early adulthood that others do. But they’re doing it without an income. They spend all the money they have. They eat out instead of cooking at home. They try to keep up with their income-earning friends, and they borrow too much money to pay for it.

You’d expect people who have a few years of life experience to do better, but they don’t. They are reducing their incomes to go back to school, but they are reluctant to go back to living like students again.

Both groups know they need to network and meet up with other students and participate in extracurricular activities. But those things can get expensive. Cutting everything out isn’t really an option, and it’s genuinely difficult to pick the right balance.

How You Can Be Smarter

This one takes practice. Get used to saying, “I’d love to, but that’s not in my budget.”

And spend some time looking for affordable alternatives you can suggest for student social events. For example, instead of expensive opera tickets, look into free nights at museums, book readings, or gallery openings. If your local sports team is expensive, check the minor leagues (you can get better seats anyway). If someone suggests a wine tasting, try doing it at someone’s house instead of a restaurant. You get the idea.

3. They’re Overwhelmed

There’s laundry and homework and dinner and all of life’s usual tasks, and getting your personal financial life under control demands uninterrupted time and energy. It’s even harder if you have additional family responsibilities, which is more common for graduate students.

Taking the time to gather all your financial information into one place—whether it’s a spreadsheet or Mint.com or another tool—requires some setup. But it’s important.

How You Can Be Smarter
Make an appointment with yourself and get a good look at your money. How much do you have, and how much do you owe? How much will the payments be? When will they be due?

If you’re not sure, make an appointment with the financial aid office at your school, and go over those numbers with them. Spend a few minutes a week tracking your spending and income, and you’ll be far less likely to run into unpleasant surprises.

Anil Dash is pretty clever

Anil Dash has a list of 10 internet laws that seem pretty accurate.

They all have exceptions, of course. Like Rule 8: When a company or industry is facing changes to its business due to technology, it will argue against the need for change based on the moral importance of its work, rather than trying to understand the social underpinnings.

Sometimes technological disruption is perfectly legit, and sometimes it’s actually undermining good things. And sometimes it’s both: Unlicensed amateur taxi drivers are not a great idea, but taxi commissions are also corrupt and unhelpful…

I’m not sure where that leads. But the list is definitely a good lens for thinking about business and marketing these days (and probably in the past as well, in most cases).

Is Getting A New Car The Right Choice Financially?

My car is a 10-year-old, 2-door hatch with low mileage and a few scratches. OK, more than a few. Like, zip ties hold part of the grill to the bumper.

Last week, the front passenger seat started flopping forward whenever I hit the brakes. That’s an actual safety hazard, and it means I’ve really got to do something.

But what?

***

Get Rid Of It?
Fewer and fewer people, especially young people, are driving cars at all. They’re expensive, and if you live in a city, you hardly need one. You can always rent one by the hour or for a weekend if you do need it. And you skip all the hassles of parking, maintenance, and gas. The Blue Book says I could get about $4,000 if I sold it, which would buy me a bicycle and a ton of Zipcar and taxi rides.

Fix It?
The cheapest thing is to fix it. I’m spending about $2,000 a year to keep it on the road, but it’s still cheaper to fix than replace. On the other hand, that repair bill isn’t going to get any smaller. If anything major breaks on the car, it won’t even be a decent trade-in.

Replace It?
You can get a perfectly fine base-model econo-box for under $15,000. If I wait until September for the year-end clearance, I could be out the door for not too much over ten grand. I’ve got some money saved up, so I’d barely have to finance anything at all.

Or I could get a certified used car with a warranty. A 2011 or 2010 model would be better than my current car, and I might be able to skip a loan entirely. That’s appealing: Nobody wants ANOTHER loan payment, right?

Upgrade?
Then again, that base model looks pretty chintzy. I don’t need alloy wheels, but I’d like a little more than the minimum. And you know, it’s cold up here in Boston in the winter, and I want those butt-warmers. Maybe a moon roof. And definitely a little more zip to the engine. Sure, Consumer Reports says that turbo models are generally less reliable. But you totally need it for a busy highway merge, right? Besides, VROOOM!

I could even go luxe: You can get a barely used (excuse me, “pre-owned”) baby BMW for $25,000. It comes with luxury-car maintenance and insurance costs, but it is a bimmer.

What Would You Do?
How much extra would you pay to go from adequate transportation to sweet ride? Would you borrow it?

The car dealership would say you can keep monthly payments down if you stretch the term of your loan to 5 or even 7 years. If I listen to them, I’ll be paying for my new car long after it’s no longer new. That’s no bargain at all.

From a purely rational perspective, the only reason to borrow money for a car is if you need it to get to work and have absolutely no alternative. Unlike a college education, a new car isn’t going to increase your earning potential. In fact, it’s bound to be worth less money in the future. But if there’s one thing that I’ve learned about personal finance, it’s that nobody is capable of being totally rational about money all of the time.

Personally, I’m hoping to aim somewhere in the middle: something gently used, with a warranty. I’ll skip the navigation and the engine upgrades, but in my book, those seat warmers are worth every penny.

Marketing’s enthusiast problem

When you think motorcycle rider, you might think of a dentist on a big Harley cruising around on the weekends. But your average motorcyclists live in India or Southeast Asia and have a 250cc or smaller motorbike as the primary transportation for their household. The American motorcycle market consists almost entirely of enthusiasts, and they’re visible. But manufacturers, if they want to sell anything in volume, need to keep the meat of the market in their sights.

Automakers have a similar enthusiast problem: Their most dedicated fans are not, in fact, their best customers. And focusing on their most enthusiastic customers can lead them into serious trouble.

Honda, for a while, wanted to be the cool car company. So they made some cool cars, and they courted the aftermarket tuner crowd. The next thing you know, their brand was tainted by things like this:

Your typical driver is not a car enthusiast. Your typical driver has an appliance that takes them places. Jalopnik and the other car media may hate beige, but the enthusiasts are merely the most vocal segment of the market. If the average driver buys a car magazine, it’s the Consumer Reports car issue. And they only buy that when they’re in the market for a new car.

When you look for the enthusiast problem, you see it everywhere. Home electronics, video games, PCs, you name it. The enthusiast audience thinks it’s the real audience. In many cases, the industry leaders are enthusiasts themselves – that’s why they went into the industry, after all. But that means they often fail to understand that their audience doesn’t love their products the same way they do.

The average college student is not a 19-year-old fraternity brother. The average video-game player is not playing FPS games on a console and drinking Mountain Dew. The average car-buyer is not looking for an engaging drive. The average PC buyer is not actually chasing clock speed.

Obviously, you need to know your customers. And when you think you really understand them, you’re probably wrong.

If I Default, Can They Repossess My Education?

Wherever you work, there are bound to be people taping or tacking cartoons to the walls. Sometimes they’re just funny stuff, but more often than not it’s something related to your job.

At my desk, I recently took down the Toothpaste for Dinner comic about applying autotune to your loans, and put up one by Emily Flake about what happens when the student loan people come to repo your BA.

***

These comics are silly, but I like them, because they point out just how hard it is to really get your mind around a loan—especially when most of the money went straight to your school and you never actually touched it.

I mean, you might be able to recycle a 1980s bassline, but it’s pretty near impossible to turn a 1099-E into a hit R&B single. It’s not at all hard to understand that if you miss car payments the repo man will come and take the car. But what will lenders do about a student loan?

They Can’t Repo Your BA … Can They?

No. They can’t. But there are still some serious consequences if you don’t pay:

  • If it’s a couple days late, send the money and you’ll probably be fine.
  • After 30 days, you’ll be two payments behind, and probably owe a late fee as well.
  • At 60 days, your credit starts to take damage.
  • When you get toward a year late, you can enter default. At that point, things go south quick.

If You’re In Default

The consequences of default are way worse:

  • Your credit damage will be severe. You will find it harder to get a credit card, a lease, a car loan, maybe even a job. (After all, employers may not trust you with their money if they think you can’t handle your own.)
  • You’ll be charged collection costs, generally 18%–25% of the amount you owe.
  • You’ll be charged interest on those collection costs.
  • You’ll be charged interest on your late fees.
  • You’ll be charged interest on your unpaid interest.
  • You could face wage garnishment, i.e., a chunk of your paycheck taken for your loans before you even get paid.
  • Expecting a tax refund or Social Security check? Your loans can take that, too.

 

So, while they can’t take back the education, lenders will get their money one way or another.

If you do default, there are ways to recover, like rehabilitation and consolidation. But trust us, it’s way better to prevent default with a payment plan you can manage.

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