This interview is part of a weekly series that publishes every Saturday. If you enjoy, please join us next week or check out past interviews.
Financial troubles do not discriminate by your major in college. I’ve known musicians who were great with money and finance professionals who couldn’t handle their own credit cards. While financial difficulties know no bounds when it comes to majors, some degrees and careers come with their own unique personal finance challenges.
Those majoring in engineering can expect nuances to their personal finance journey. Careers in these fields start out earning high rates of pay. According to the National Center for Educational Statistics, the median income for engineering students one year after graduation was roughly 68% higher than the median for degrees.
However, with great income opportunity there is a great cost. The University of Florida calculated the average costs of degrees using a number of methods. Depending on the calculation method, a mechanical engineering degree costs between 48% to 75% more than an average degree. And there is more:
Merely attempting a college degree increases your chances of bankruptcy. A study from the St. Louis Fed showed that a large majority of defaulting mortgagees during the housing crash were educated, working professionals.
Today, our special guest is going to share with us what engineering and science students need to know about personal finance.
Jacob is the owner, author, and creator of the personal finance blog My Personal Finance Journey and the monthly Carnival of Passive Investing. Jacob received undergraduate degrees in Biomedical Engineering, Finance, and a minor in Spanish in 2008. Upon graduation, he worked as an engineer at a major pharmaceutical company for 2 years. Last fall, he returned to graduate school to obtain his PhD in Chemical Engineering and is currently performing research in Alzheimer’s disease drug development.
(Me) What unique financial issues do students in engineering and science face?
(Jacob) First off, I just wanted to take a moment to thank Shaun for offering me the opportunity to do this interview and also to the Yakezie group for connecting the two of us.
Overall, I’m not quite sure that the financial issues that students in engineering face are unique in a strict sense of the word. However, there are some definite issues that engineering and science students encounter fairly often in the personal finance world that I think are worth highlighting.
Students in the fields of science, and especially engineering, encounter somewhat unique situations earlier in life than other disciplines due to the fact that they often can earn high paying jobs directly after undergraduate studies (or even as interns during college!). For example, it’s fairly common for full time chemical engineers working in the pharmaceutical industry to earn approximately $70,000 per year plus benefits right after undergrad. For engineers working in the petrochemical industry, this salary can be close to $90,000. Talk about plush living right out of college! Furthermore, summer internships at companies during college are becoming fairly commonplace these days. Often times, students can earn close to $25 per hour in these jobs. This is more than a lot of people make in their regular jobs. Now, contrast this with a student studying to become a doctor or a business-person who most likely will have to work 5 years or more (including residency for doctors) to begin earning at these levels.
Because these engineers and scientists begin earning significant money at such an early age (perhaps before they are truly ready or prepared as far as financial knowledge goes), several issues present themselves. The first issue relates to the realm of intelligent investing. In my experience (sadly), most engineers and scientists who earn a significant sum of money as an intern or their first job do not really know how to invest or save the money. They aren’t sure whether they should pay down student loans, save it in a savings account, or invest it in the stock market. Because of this indecisive state that occurs, it has been my experience that there is more of a tendency to SPEND the money rather than save. Another risk that I’ve encountered all too often with engineers and scientists in their first job out of undergrad is what’s called “cubicle copying” with regards to their 401k investments. Essentially, what this phenomena involves is that since a person doesn’t fully understand the mutual fund investing options in their new 401k retirement account, they simply ask their friend next to them at work what they invest in and copy accordingly. Now, as you might imagine, everyone’s investing needs are different, so blindly copying your neighbor out of ignorance is not a good thing at all.
The second main issue relates to debts. As mentioned above, since scientists and engineers earn significant money at relatively young age, I’ve often seen a tendency to rack up large amounts of debt immediately after starting a new job. This often involves the purchase of new cars, houses, furniture, big screen TVs, etc on credit or on their credit card. It sort of breaks my heart to see this because racking up large amounts of debt at the age of 23 takes away a person’s flexibility and ties them down to the job essentially.
(Me) Fact or Myth: Is buying the latest technology a common vice for engineers/scientists? If yes, how do engineering/science students fall prey to this vice; what justifications are common? Are there any other financial vices and why?
(Jacob) In my experience, this is a myth. It has seemed to me that engineers and scientists are just as likely to have the latest tech gadgets as a business major or a lawyer. However, it’s possible that since engineers and scientists can make more money at a younger age before financial maturity has set in, some might be more inclined to make these purchases.
(Me) Could you provide three general misconceptions that engineers/scientists have about personal finances?
(Jacob) This is a good question! My top 3 are listed below.
1) “I should buy everything on my debit card” – I often encounter engineers and scientists who don’t have a credit card at all. Instead, they simply use their debit card for all purchases. Truthfully, it makes sense how this would happen. After all, you technically can make all of your purchases just fine using a debit card. However, I generally have to show these individuals that paying with a credit card enables you to build a credit history and also accumulate cash back and/or other rewards.
2) “I’ll just delay setting up a retirement savings account” – I also often encounter engineers and scientists who insist on delaying in setting up a retirement account (401k or Roth IRA). Instead, they park large amounts of money in super-low interest bearing savings accounts. What they should be doing at a young age is to invest this money to take advantage of the Time Value of Money / compound interest.
3) “I can completely change my lifestyle after I start my first engineering/science job” – This relates to the debt issue discussed above. All too often with engineers and scientists that have just landed their first job, I see that they immediately upgrade pretty much everything they have – furniture, car, house, equipment, going out to eat, etc. However, if they could simply maintain a couple of their college lifestyle habits, it could save them large amounts in the long run.
(Me) What personality traits make it easier or harder to talk finances with engineering/science students? What walls get thrown up and how do you overcome those barriers?
(Jacob) This is actually one of the major reasons why financial matters are so difficult for engineering and science students. In short, the reality is that many of these students simply have no interest in learning finances. They view it as sort of a “taboo” subject. And, it’s very difficult to reach someone on a topic they care nothing about.
Now, don’t get me wrong. I believe that the majority of students do care about finances and are willing to learn. In fact, the engineering and science students who ARE interested in finance often excel in becoming leaders in companies where they deal heavily with financial matters.
(Me) What ways can engineering/science be similar to personal finance? Are there any common engineering/science methodologies, approaches and/or techniques that convert well into good financial tools?
(Jacob) Definitely! There are many similarities. In fact, as I mentioned above, if scientists and engineers put an emphasis on learning finances, many of them become quite successful. I’ve also found that there are quite a few personal finance bloggers that are engineers as well. T
he most significant similarity that I find useful to both science and finances is attention to (and patience for detailing with) detail. Often times, when I am analyzing my finances or trying to assess the effectiveness of an investing strategy, it involves looking at hundreds (if not thousands) of lines of financial numbers. Having the ability to assess these details in a methodical and patient way is a skill that is common to both science, engineering, and finances.
As far as specific engineering/science methodologies that translate in to good financial tools, there is one in particular that I think of quite a bit. In Burton Malkiel’s book entitled, A Random Walk Down Wall Street,” he explains his findings that the fluctuations of the stock market are in fact random over short term periods, but do show significant upwards trends during 10-20 year long-term periods. This concept is very closely related to diffusion in the mass transfer world of engineering. Diffusion also involves random small fluctuations of particles or small organisms. However, the overall trend is a movement down concentration gradients. How does this concept of random movements relate to the investing world? Read below to find out.
So, since we know that short term fluctuations in the stock market are random, logic dictates that it is futile to attempt to predict where it is going for short term profit. Because of this, the investing strategy of which I am a big proponent is called passive investing. Essentially, this involves buying and selling passively managed index mutual funds in order to maintain a certain target asset allocation split between different fixed income and equity asset classes.
(Me) I’m an engineer/scientist just coming to the realization that I need to take personal finance seriously; could you tell me where to start and how I can avoid becoming bored or complacent with my new interest? What can I expect down the financial road and how I can meet those challenges?
(Jacob) The first thing to do in getting started with taking personal finance seriously is to make sure that as new funds come in from paychecks each month, it is prioritized properly according to greatest need. I’ve discussed this in detail in what I consider my most important post on my site, which can be found at the following link – My Personal Finance Journey Account Hierarchy. This will also involve having you set up an IRA, 401k, and emergency fund.
Once you’ve established these accounts and determined the priority for which funds should be allocated, you then need to set up what’s called a Purpose Focused Financial Plan. Essentially, the goal of this plan is to save money for activities which match and support your life values and dreams. I’ve discussed building this plan in detail on my site in a 4 part series which can be accessed at the following link – Creating Your Purpose Focused Financial Plan. Since saving money for these purposes will help you lead a fulfilling life at a core-values level, I believe that it helps people to avoid becoming bored with finances. Also, I do a monthly portfolio review and a yearly life values and dreams review to ensure I stay on top of things.
Read more from Jacob of My Personal Finance Journey:
- Top 10 Highest Net Worth People and What We Can Learn from Them
- Cost of Living in California Compared to…Anywhere Else
- A Simple Way to Banish Credit Card Interest
Read More from Past Interviewees:
- So Over Debt: FINCON11 and Steve Jobs
- Money Talks: Perfectionism Kills
- The Money for College Project: Scholarship Saturdays: Weird Scholarship Edition
Next week’s interview is Kyle from The Penny Hoarder: