A distinguished professor's advice for millenials on personal finance

Today’s post is special, we are joined by Professor of Finance Pat Obi, from Purdue University. Professor Pat is a renowned expert on finance and having read his book entitled “We must change the way we live” (which can be found here), I was incredibly keen to reach out and ask for his advice for millennials who want to make the best financial decisions. So, let’s get straight to the interview:

M: “Welcome to Millennial Financial Freedom Professor Obi. It’s a pleasure to have you with us”

Tell us about yourself?

I’m a Professor of Finance at Purdue University Northwest, Hammond, Indiana in the United States. Additionally, I engage in financial and statistical consulting for firms and organizations.

What do you define as being a financially responsible young man?

First, a person who lives debt-free. Second, an individual who limits his spending to his take-home pay. My guiding principle is, if you can’t pay cash for it, don’t buy it. Note, this view does not negate the proper use of a credit card, which not only helps build credit but also, serves as a convenient means for making online payments.

Are student loans a good idea?

It depends. As I state in my book, We Must Change the Way We Live, education should be viewed as an essential investment in human capital. We’re more likely to be better skilled, get a better job, and earn more money the higher our level of education. But like any good investment, the expected income after graduation has to exceed the cost of financing that education; otherwise, the merits of the loan become questionable.

Specifically, your expected stream of income after graduation should be more than enough to pay off your student loan in a timely manner. My recommended timeline is within 5 years of graduation – to avoid excessive financing cost. Where that’s not the case, such loans might turn out to be a lingering nightmare. But this might be more of a problem here in America than elsewhere.

Here in the US, education loans, unlike other personal loans, cannot be discharged in personal bankruptcy. They continue to be a financial liability for as long as they’re unpaid, regardless of the borrower’s financial or employment situation. Therefore, before taking out a student loan, the borrower should carefully consider the size and cost of the loan and the ability to quickly pay it off from post education employment.

How can someone without a PhD in finance be financially responsible as a husband and/or father?

It doesn’t require a PhD in finance, or for that matter, a college-level education in finance, to use money wisely. There are many highly educated people with financial problems. And there are many not-so-well-educated people who use money with a good measure of responsibility. Financial responsibility, I believe, is grounded on a well thought-out family budget. The budget should specify all monthly spending priorities and align them with take-home pay.

What is the best way to save?

I believe the best approach is to have a blueprint – a financial plan. The plan should be in two parts. The first section outlines the monthly investments. The second part details the recurring monthly expenses. Investments and expenses constitute the total cash outflow from our monthly take-home income.

There are four types of investments that should be funded on a monthly basis: (1) Retirement savings, arguably our most important investment (2) Ordinary long-term investment, e.g. money you put away towards the future purchase of a home or some big ticket item (3) College savings, for those with young children (4) Emergency savings.

The first three investments – retirement savings, ordinary long-term investments, and college savings – should be placed in a well-diversified stock mutual fund (a stock index portfolio), since they are long-term in nature (these are investments for periods in excess of 10 years). Emergency savings, on the other hand, should be held in a low risk interest-bearing account such as a bank savings account or fixed deposit investments.

An emergency savings account is designed to accumulate sufficient funds to take care of future household payments in the event of a temporary income loss or unbudgeted contingencies. I recommend that emergency savings be sufficient to pay for up to nine months of total household expenses, to be on the safe side of things.

Is it important to give to others and to what extent should one give?

Giving is a very personal thing. It’s perhaps the most practical way to show gratitude for the blessings in our lives. Having said that, I think we should be careful to give within our means. As the old saying goes, nemo dat quod non habet, Latin for “you don’t give what you don’t have.

Are there any resources or tools that you can recommend for young men who want to be financially responsible?

There are a number of resources out there, especially on the Internet. I don’t have specific recommendations. My favorite financial educator though is Suze Orman. I like her teaching style because it’s practical and humanistic. And if I may take a bit of an interviewee’s privilege, I daresay that much is to be gained from reading my book, We Must Change the Way We Live. Even though it targets the American audience, the financial principles outlined in the book are universal.

What are your favorite bible verses on personal finance?

Luke 16:10-11. “Whoever is faithful with very little will also be faithful with much, and whoever is dishonest with very little will also be dishonest with much. If, then, you have not been faithful with worldly wealth, who will entrust you with true riches?”

Do you have any final advice for our readers?

We should always attempt to place our humanity first when deciding how money should be used. In my opinion, money should be used for the value it provides; not for its own sake. As a financial educator, I find that the value of money is only fully realized when we use it wisely to serve our primary needs and further, lend a hand to others who, without our beneficence, might not be as fortunate in their own life’s journey. I believe that true success is evidenced by the positive impact we make in the lives of others using our God-given resources.

“Dr Obi, thank you very much for your time. I personally am reading your book entitled ‘We must change the way we live’ which is full is pragmatic and wise financial advice. I absolutely recommend it.”

Details of Dr Obi’s book can be found in the links below.

Available via most online retail sites such as: https://www.amazon.com/Must-Change-Way-Live-Introspective/dp/1480808520.
US residents can buy autographed copies at: www.patobi.com