Personal Financial Decision Making

College students may master Shakespearean English and calculus formulas, but can they understand a car lease contract or the small print on a credit card offer?

Mark McCarthy, assistant professor of accounting at DePaul University in Chicago, is teaching students to do just that through a course called Personal Financial Decision Making.

Open to students with any major, the course educates students on practical, everyday financial issues such as managing a household budget, bank accounts and credit cards, investing wisely and getting the best deal when buying a car or first home.

McCarthy said he launched the course last year because he saw a shortcoming in the education of college students.

"The personal financial issues we discuss in class are issues students are already facing or will face soon when they graduate and begin their careers," McCarthy said. "A lot of people were graduating without knowing the basic life skills to be successful. A well-rounded person needs to understand personal finance."

The ability to manage money wisely is increasingly important for college students who rely heavily on loans to pay for school and have easier access to credit cards than in the past.

Recent college student surveys by Nellie Mae, the largest nonprofit student loan provider, illustrate this. One survey found that 65 percent of college students have credit cards and 20 percent have four or more credit cards. The average credit card balance was $2,226, with 24 percent owing more than $3,000. Another multistate student survey found that the average total debt of the students at graduation was $18,800 in 1997, up 129 percent since 1991.

In his class, McCarthy walks students through common personal finance paperwork and assigns several consumer research projects. Students learn to keep a monthly budget and avoid bad spending habits, the language of car and home purchase contracts and tax return strategies.

One project requires students to use the Internet to investigate credit card offers by banks and report on the best deals. For another assignment, McCarthy gives students the names of two Chicago suburbs and asks them to research starter homes and condos in those areas.

"The biggest issue they want to know about is stocks and mutual funds," McCarthy said. To help students better understand the market, McCarthy takes the class on a field trip to the Chicago Board Options Exchange, where he explains how the frantic gesturing of floor traders relates to investment dollars.

"Many of students have told me this is one of the most useful classes they've ever taken," McCarthy said. "I'd rather they make financial decision-making mistakes in class now rather than later, when they walk into a car dealership or go to purchase a home."

TIPS FOR COLLEGE STUDENTS

Assistant Accountancy Professor Mark McCarthy, who teaches "Personal Financial Decision Making" at DePaul University in Chicago, has these money management tips for college students:

AVOID BAD SPENDING HABITS

"Keep track of your income and expenses in a household budget," McCarthy says. "You can't take control of your finances if you don't have a handle on what's coming in and what's going out."

BE SMART WITH YOUR CREDIT

"When it comes to credit cards, be a balance payer," McCarthy advises. "Interest charges can add up quickly on credit card balances that are carried over from month to month."

START INVESTING EARLY

"If you want to save for the long-term future, you need to start in your mid-twenties. If you wait until you are 35, it's almost too late," McCarthy says.

McCarthy explains why: If a 25-year-old invests $3,000 per year and earns an eight percent return on the investment, the person will accumulate $777,000 by age 65. If that same person waits until 35 to invest under the same conditions, he'll have only $340,000 by retirement. "By starting at 25 rather than 35, a person winds up with more than double in investment funds by retirement age," he said.

FUND RETIREMENT PLANS TO THE MAX

Although retirement planning is not on the minds of most college students, McCarthy advises them to remember to contribute as much as possible once they get their first jobs. "It's such a good deal," he said. "You're not currently taxed on income going into a retirement fund, so you're saving tax dollars now while saving for the future. Employers often contribute a percentage of what you contribute, often 50 cents on the dollar, so it makes sense to contribute the maximum amount."

UNDERSTAND THE DIFFERENCES BETWEEN LEASING AND BUYING A CAR

"Leasing a car is more common today and an option college students may consider," McCarthy said. "While leasing is a way to drive a nice car that you can't afford, there are a lot of disadvantages. It's important to understand the lease terms. Leasing often costs more than buying in the long run."

Editor's Note: McCarthy can be reached at (312) 362-6901.