The Official Online Newsletter of Pilipino Americans in Science and Engineering
at UC Davis
Table of Contents
The Iliad and the Engineer: If Homer were a PASER
Economics 101: Finance for Engineers
A Brief Word from our Presidents
What
A Journey It Has Been
PASE LET’S BOWL
Economics 101: Finance
for Engineers
By Humboldt J Ramirez
It’s been three years since you’ve
lived at home and you feel you’ve
become quite independent since you graduated high school. You’ve learned
to do your laundry using a washer that can barely fit a load of laundry
and a dryer that only dries sweaters and towels while leaving the rest of
your clothes slightly damp but temptingly ready to wear. You’ve also
learned how to manage your time between classes and Culture Night. You’ve
even learned how to create a well balanced diet from a Carl’s Jr. #4,
Pizza Hut breadsticks, and an occasional Sobe for those essential vitamins
and herbs. The final indication of your independence ... a semi-balanced
checkbook, a campus job, and a credit card. But while you’re glancing at
your checkbook, waiting for G-Line you notice something. You don’t have
enough money in your checking account to cover the fifty cent course
catalog you just bought with your Wells Fargo Check Card and do your
laundry later tonight. Now the wheels of creativity start to whirl in your abacus upstairs and you think of different scenarios to
resolve this half-dollar oversight in your finances. You decide to go
through your couch to find some loose change so that you can wash a hybrid
load of the essential outfit (two red-striped socks, teal boxers, green
sweat pants, and a blue PASE T-shirt) for tomorrow. Then you marvel at
your own ingenuity, not only are you reallocating lost financial resources
for laundering, but this powerful innovation also relieves you from
wearing the creased khakis and pinstripe shirt that you reserve for
interviews, banquets, and finals week. No wonder you’re in PASE! But you
and a couple roomies used that change and some money from recycled cans to
bring Taco Bell to a potluck the night before. How did you get into this
financial crisis?
Well if you can relate to this slightly exaggerated account I strongly recommend enrolling in Agricultural Resource Economics 142 (ARE 142) with Professor Shepard if you are looking for a practical and enlightening course. This class is more than how to balance a checkbook; it’s a lighthouse to financial independence. However if you can’t fit this three unit course into your schedule of chemistry, physics, engineering or bio classes here’s a crash course in making the almighty dollar and keeping as much of it as possible. Before I begin, sources, proofs, and algorithms will be omitted for your temporal convenience and also because the following is not as entertaining, unlike the magnificent story told earlier.
You have probably had enough time on your hands to ponder many questions about life, identity, and who’s at the Silo. So ask yourself, "Do you want to work to live, or live to work?" Think about the lifestyle you would like to have when you finally leave here with that degree. Then think about your lifestyle now. Do you live a life of high consumption or do you live within your means? If you spend in anticipation of your next paycheck while accumulating debt on your credit cards then you are living outside of your means. Sure you’ll be earning more than $40,000 the moment you graduate from Davis, but if you live a $50,000 lifestyle then you’ll most likely be working to pay off debt rather than working towards retirement. In most cases, those who live outside of their means will take longer to retire and will most likely fail to be financially independent. One of the principles from ARE 142 is, "credit accelerates but reduces overall levels of consumption whereas saving defers but increases consumption." This means that you can buy those new shoes nobody has right now! But if you already have a $400 balance on your credit card then you’ll be paying finance charges for the ability to purchase on credit. Then you realize you could have used the $20 finance charge to buy a new CD or go on a date after you get out of that late night lab. Credit will also affect loans for a house or a car loan. There is a common misconception that "you’ve got to use the plastic" to build good credit history." Think about this...credit history can only ruin your chances of a loan. If you’ve never used credit why would a bank have a problem lending you money, you are obviously living within your means and managing your finances.
The following will probably spoil your plans after graduation. If you can accept that housing is the largest expense that anyone will have in his or her life after graduation, then why shouldn’t you get a house as soon as you get your degree? Sure you might think you’re too young, you don’t know where your job will take you, or you’ll probably live with your parents for a while. All but the first are valid reasons, but the point is to save money for a down payment so that you have the ability to live on your own instead of depending on your parents for shelter, again. This might also prevent you from buying that new 4-Runner, Volkswagen, or Prelude too. Know this ... currently a house in California appreciates at twelve percent every year whereas a car depreciates at ten percent every year (twenty percent the first year).
If you do decide to buy a car, get one that you can afford in cash. You might not get the newest Integra or Celica, but you’ll save money. Buying a $13,000 car with an 80% loan will ultimately cost you 33% more (or 74% more if you lease) than if you buy in cash. Basically, avoid buying a car with a loan and never lease a car. You can use that extra grand to invest in E*Trade.
Lastly, you’re never too young to invest. The earlier you start the more you can make. For example, if at 23 years old you invest 15% of your income in common stocks (which return at 12.5% on average) then by age 43 that account would be worth about $1,074,537. Take advantage of 401K’s if your co-op or job offers them, it’s never to early to think about retirement especially if you want to retire at 35. You won’t be taxed on them until you’re 65 and it reduces your taxable income. Your campus job may already have a 401(a) account for you. Start a savings account; not only will that bail you out on a real emergency such as a blown alternator or a bid to the PASE banquet, but you’ll feel a sense of financial independence, freedom, and maturity because you have the ability to solve financial problems instead of depending on your parents to bail you out.
The idea is know your financial limits and live well within them. Then once you figure that out, save and invest your money so you can buy your car or house. Not only will you find that you are less stressed about money, but you’ll also have more change to do your laundry.
If you have any questions, you can contact Humboldt at hjramirez@ucdavis.edu