According to The Economist magazine, opportunity cost is defined this way:
“The true cost of something is what you give up to get it. This includes not only the money spent in buying (or doing) the something, but also the economic benefits (utility) that you did without because you bought (or did) that particular something and thus can no longer buy (or do) something else.
For example, the opportunity cost of choosing to train as a lawyer is not merely tuition fees, price of books, and so on, but also the fact that you are no longer able to spend your time holding down a salaried job or developing your skills as a footballer.”
OK, so you figured out from that "footballer" reference that The Economist is a British publication, yet the implications of their definition of opportunity cost are as relevant here in Baltimore as they are in London or Liverpool. Every financial decision you make about your future career and education has both short-and long-term implications.
INTERESTING SIDE NOTE:
By the way, our own Kevin “Kal” Kallaugher, UMBC artist in residence, has published editorial cartoons and covers in The Economist for over three decades. Read more about him here.
So with all of this in mind, perhaps an honest assessment of your current knowledge of key student finance principles could help you to make more sound and strategic plans for the future. Here’s a quick diagnostic quiz to see how much you already know (since you have been learning about money almost from infancy) and where you need to step it up. The answer key is at the bottom, but do not peek.
1. The best way for a college student to start building a good credit rating is:
a. Having as many credit cards as possible
b. Being an “authorized user” on a parent credit card
c. Charging large amounts on your credit card
d. Having a responsible co-signer on your credit card
e. None of the above
2. A student should file a Federal income tax return, even if you are still a dependent on a parent’s return, if your income was at least:
a. $400 in earning from self-employment (lawn-mowing, dog-walking)
b. Any amount if Federal taxes were withheld
c. More than $950 in unearned income (dividends, interest, etc.)
d. More than $5,950 in earnings from a job
e. All of the above
3. When should you file a Free Application for Federal Student Aid (FAFSA) as a prospective graduate student?
a. Never, because the whole concept is limited to undergraduate studies
b. When both you and your parents have very limited means
c. Once a year, by the Cinco de Mayo (or was it Thanksgiving?)
d. It depends, ask a Financial Aid Counselor at the university you plan to attend whether FAFSA is a good avenue for you
e. None of the above
4. What is the most serious threat to financial solvency for typical college juniors and seniors?
a. A latte habit
b. Parents with unrealistic expectations about how much things cost
c. Failure to budget in advance
d. Over-reliance on credit cards with high interest rates
e. Inattention to financial plans in general
5. What is the most egregious (look it up if you don’t know it—it was on the SAT) waste of money for a typical college student?
a. Multiple parking tickets adding up to hundreds of dollars
b. Buying textbooks new when used were available
c. Leaving money unused on your meal plan because you ate out frequently
d .None are egregious
e. All are egregious
6. What is the best thing a college student can do to prepare for a promising financial future?
a. Build and maintain a high credit rating
b. Start an IRA (retirement account) the minute you start earning money
c. Major in engineering
d. Run a business on the side while being a full-time student
e. None of these strategies is a standout
7. The most important reason to have adequate car insurance in force every minute you are driving is:
a. Insurance is required under Maryland law
b. Insurance can pay for repairs to your car if you have an accident
c. Insurance will pay the medical expenses of anyone injured because you ran into them
d. If you do not have insurance and you injure someone badly, you or your parents could be sued and have to pay enormous amounts of money out of pocket
e. All of the above
AND NOW, THE ANSWERS
Question 1: (e) None of the above
The key to building a good credit rating is to have a card in your name (not just “authorized user” status or cosigned), to charge either a small or large amount relative to your credit limit, and PAY IT OFF ON TIME!!! Timely payment is absolutely the most important factor. And try to pay it off in full to avoid costly interest expenses.
Question 2: (f) All of the above
Figuring out if you need to file a tax return while still a dependent is a little tricky—depends on what kind of income you have. But if you had a job that withheld taxes from your pay, you MUST file a return in order to get a refund. If you do not file, you will have made an unsolicited donation to the Federal treasury. (Source: IRS Publication 501: Exemptions, Standard Deduction, and Filing Information)
Question 3: (d) It depends; ask a Financial Aid Counselor at the post-graduate university you plan to attend.
Federal work study aid and subsidized loans can be helpful to fund graduate and professional school. In fact, the FAFSA is applicable to graduate education and usually, the income and assets of parents are not relevant.
Question 4: (e) Inattention to financial plans in general
It is easy to get caught up in academics, social life, your job, etc. and not do the planning ahead that is needed. And if parents are your problem, you need to PLAN how to make a strong case to them that additional funds are needed.
Question 5: (a) Multiple campus parking tickets adding up to hundreds of dollars
This one wins because it is completely avoidable, not only wastes money but gives you a negative record with the university and a “financial hold” that prevents you from registering, sending an official transcript, or receiving a diploma.
Question 6: (a) Build and maintain a high credit rating edges out (b) Start an IRA early
Your credit rating is so key to your future! Not only does it affect whether you can get a car loan, rent an apartment, or what interest rate will be offered to you, it may even prevent you from getting certain educational loans down the road. Did you know that the average medical student incurs loans of $170,000 and that 86 percent of medical students have indebtedness when they graduate? (Source: Association of American Medical Colleges, Feb 2013 report on medical education costs) A poor credit rating could prevent you from being able to borrow the money you need for professional school.
Question 7: (e) All of the above
You need to know not only that there is insurance, but that payments have been made on time to keep it in force. You also need to know whether it covers just the damage YOU do to others, or also the damage to your own vehicle if you are hit by someone without insurance, for example. If you drive a car, whether your car or your parents’ car, take time to understand your coverage and make sure it is adequate.
SCORING THE QUIZ: HOW MUCH DID YOU KNOW?
1-2 questions correct:
Your financial literacy is lagging and you need to get busy learning about taxes, insurance, investments, loans, credit, and more ASAP!
3-4 questions correct:
You are heading toward financial competence. Keep learning!
5-6 questions correct:
You are getting to close to MASTER status. Just fill in the holes.
All 7 questions correct:
You must be a Financial Economics major! You show an unusual perspicacity and acumen in the financial realm. You have earned the title “MASTER of Money Management”! But do not get complacent—continuing education is necessary and you will really have to step up your financial savvy after graduation.
FOR MORE INFORMATION: ADDITIONAL RESOURCES
“What Students Need to Learn about Money” by Seth Fiegerman on the Main St website
“College students and personal finance, Part 1: Credit-card debt” on ConsumerReports.org
This article also addresses the pitfalls of pre-paid cards.
“Top Five Money Mistakes College Students Make” by Jeremy Vohwinkle on About.com Financial Planning
EXTRA CREDIT DISCUSSION QUESTION
What “opportunity cost” dilemmas have you thought about with respect to your future career and/or graduate school plans?
Share your thoughts in the comments section below.