As some of you already know, I’ve been taking classes through Penn State’s World Campus to lead me (hopefully) to become a Certified Financial Planner. My goal is two-fold. First, I think this education will help me to better help my student population. Second, I think this will lead me to a nice side-gig that I can pursue for a bit of extra income after I retire from Penn State. This semester I’m taking a class in Corporate Finance. At first I had my doubts about how practical this class would be for me. But it turns out I really enjoy it.
Last week we started learning about something I’ve been preaching about for years: the time value of money. A dollar today has a different value than that same dollar a year from now. If you put in into a savings account with a 2.0% interest rate that dollar is worth $1.02 in a year. If that dollar was borrowed from a Grad PLUS Loan with a 7.6% interest rate, the use of the dollar is costing you an additional $0.076 for the privilege of using it for the year. Whether you are saving or borrowing (I know…borrowing is much more likely at this stage in your life) it is important to understand the power of compounding interest.
There is a reason you’ll always hear someone telling you to start saving for retirement at the very beginning of your career. The earlier you start, the longer your money has to grow. The older the dollar, the more time it has to age. That dollar that was worth $1.02 after one year is worth $1.48 after 20 years—and that’s at 2% interest. With a more typical 10% retirement investment return that dollar is worth $6.73 after 20 years. $17.45 after 30 years. $45.26(!) after 40 years. The longer the money has to grow, the more exponentially it is able to grow.
Much like you want your interest to compound for as long as possible when you are saving, you want it to compound for as short a time possible when you are borrowing. Because student loan numbers can be scary, let’s look at a car loan. Let’s assume you are borrowing $15,000 to buy a used car. Your interest rate is 4%, regardless of the repayment term. If you take 7 years to pay it off you will pay $205.03 per month and you’ll pay a total of $2,223 in interest. If you shorten that to 6 years, you will pay $234.68 per month and you’ll pay a total of $1,897 in interest. Shorten it to 5 years, and the payment is $276.25 and the total interest is only $1,575. The shorter the term, the less interest you pay. The same rules apply to your student loans and someday your home mortgage. The shorter the time you take to repay it, the less you will pay in interest.
Next time you make a deposit to your savings account or borrow a little extra loan money, take a moment to think about the time value of money. Every dollar is worth more (or less) than you think!
We have officially arrived at the most stressful point in the semester. Classes are winding down or already completed. Papers are coming due. Exams loom near. Sometimes it seems like there simply aren’t enough hours in the day. It happens to everyone. And, sadly, it doesn’t end when you finish school. There will always be times in your life when you find yourself overextended.
I’m having one of those weeks right now. I was traveling this weekend, so I didn’t have quite enough time to get all of my typical weekend adulting done. I was able to complete my laundry, but I just didn’t have it in me to get to a grocery store last night. Sometimes you have to cut corners when time is tight. But the important thing is not to overextend your budget just because your time is stretched too thin. It would be really easy to exist for the entire week on takeout food and Au Bon Pain. But that would cause serious pain to my pocketbook. The better alternative for me was to log into the Walmart grocery app this morning and put together a grocery order for pickup tonight. Since I really don’t have anything resembling a dinner in my house right now, I’ll stop at Wegmans on my way home to grab something from the frozen case for tonight’s nourishment, and then by 8 tonight I’ll have my Walmart grocery order. It could have been a whole week of restaurant food, which would have easily been $20 a day or more for my husband and me. Instead, I took a short cut to really get some groceries.
We can’t always do things exactly the way we’d like, especially when time is tight. But in this world of modern conveniences there are ways to less expensively work around time constraints.
Exam time is hard. Sometimes corner must be cut. But you’ve got this. Use the tools available to you, and you will make it through!
Last week, at the peak of Penn State undergrad move-in days, I found myself standing in line at a State College big box discount store, watching befuddled students and parents trying to figure out how to ring a giant plastic drawer unit through the self-checkout lane. I knew it was move-in and I knew the store would be insane. I had other options. And I went anyway. Why? Frugality.
I was in need of a new sleeping bag for a camping trip in the State Forest last weekend (a frugal woman’s vacation!). And I knew I had two options. I could go to the sporting goods store and pay more than I wanted to. Or I could go to the discount store, brave the move-in crowd, and save myself ten to twenty dollars. My time and my sanity are valuable to me. But in this situation, I would likely only have saved myself about ten minutes by going to the sporting goods store rather than the discount store. My time is definitely valuable. But “one dollar per minute” valuable? I don’t think so.
When you’re trying to weigh out the frugal option versus the convenient option, you should definitely factor in the value of your time. But be careful not to overvalue your time. A lot of times the frugal option makes a lot more sense. Besides…you wouldn’t want to miss out on the entertainment value of undergrads trying to run jumbo items through the self-check, would you?