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A Beginner's Guide to Money After University

2015-03-29 — 17 minute read

So you've graduated or are about to graduate (woo! congrats!), or maybe you're just interested, and you've never had much education on money in the so-called "real world". At least, this was my situation about 3 years ago. The following is everything I've learnt about money in the last 3 years, and the idea is to put you in a strong position to know whether you're being fairly compensated wherever you end up working.

Note: Being a Brit, this post only really applies to the UK. I don't know much about compensation or taxation in other countries.

# Salaries

This will be the main part of what will make up your "compensation package" in any full-time job. It's what determines how much income tax you pay, as well as how fast you'll pay back your student loan.

Salaries vary vastly between industries, your location, your level of experience, the supply/demand of the job and, let's be blunt, the attitude of the company you're going to work for. Companies that don't put much value in their employees, and know that they can just hire more if they start losing people, are going to be paying a lot less.

It has also become rather common for people to be on unpaid internships, which aren't strictly illegal if they're phrased in a certain way. Though it seems that the problem is getting enough attention to warrant some parties to want to do something. Either way, know your rights and avoid being exploited.

# Is it worth doing an unpaid internship for the experience?

It's a tough call. It depends on the situation. While I'm of the opinion that everybody should be paid for their work, lots of companies disagree. If you feel like an unpaid internship is a great way to get your foot in the door, go for it. However, please do be careful. It's unhealthy to stay in an unpaid internship for extended periods of time (e.g. months), don't be afraid to refuse to continue working without a salary.

# Knowing what you're worth

The next step is to come up with a number for how much you think you're worth. You're going to get asked this at some point and having a number is better than silence.

Data does exist on average salaries in the UK and even salaries by job type. It would be a good idea to see where your profession sits to get a good idea of how much your skills are worth on average.

Don't be afraid to attempt to negotiate your salary if you think the initial offer is unfair. It's in the company's best (short term) interest to try and low-ball you. The worst that can happen is that your negotiation fails and the offer doesn't change. You can still accept it if you want to.

# Knowing the minimum you'll accept

Never accept a job offer before working out exactly what your financial situation will be if you do accept it. Work out, as accurately as you can, what your monthly outgoings will be. Here are the things you'll need to factor in to your calculations:

Because I'm a big fan of real, concrete examples, here are my own monthly outgoings (income is omitted because it's a really sensitive issue and I don't want to hurt anyone or get into trouble):

All told, my outgoings each month are approximately £1671.05 plus student loan (which isn't listed because you could reverse engineer it to figure out my income). That's for everything, including savings. Leaving a little budget for fun, I could live off a salary of £30,000. It would give me a take-home pay of £1848.06 per month. I could lower this number (thus increasing fun) by living somewhere cheaper, cancelling subscriptions, being more frugal with day-to-day spending etc.

The important thing is that you should know these numbers ahead of time. If you're moving house to take a job, be sure to ask your landlord or agency what the bills on the property are expected to be. Get angry with them if they lie to you.

# Holy crap that's a lot of tax

Assuming you've had a look at a tax calculator and played around a little bit, something that might shock you is how much tax you have to pay. This was the first thing about life after university that dawned on me: about a third of the money I earn never makes it to my bank account. The following chart shows proportions of tax paid for a range of salaries (using 2015/16 numbers for an unmarried person under the age of 65):

# What is income tax?

This is the money you have to pay to whatever country you live in because you're making a living there. It's used to support the country and its inhabitants. Pretty much anything that can be considered "public" -- emergency services, NHS, building/repairing roads, welfare, education -- is supported by income tax.

There are different "bands" of income tax which mean you pay progressively more tax the more you earn. This gets commonly misconstrued to imply that there are situations in which earning more money is a bad thing (psychological effects aside). This is false, as the above chart should demonstrate, and I'll explain why.

Imagine your salary as being split up into chunks. On the first chunk, you pay no tax at all. This is called your "personal allowance" and we all get one. Hooray. The next chunk gets taxed at the "basic rate", which is 20%. The next chunk gets taxed at a higher rate, which is 40%. The rest is taxed at 45%. So if you're earning enough to be getting taxed at 45%, it's only the last chunk of your money that's getting taxed that much. The basic rate chunk is still taxed at the basic rate, and so on. If you want a more full explanation with real numbers, check this article out.

# What is National Insurance?

This is the money you pay in order to receive things like paid maternity leave and "state pension" (a little more on those later).

The interesting thing about National Insurance is the drop-off in tax as you earn more money. It's done in much the same way as income tax insofar as the first band you don't pay anything, but then the next band is 12% and the last band is 2% (yes, two percent). The assumption being if you're earning that much money you probably don't need a state pension or paid maternity leave? I'm not sure. If you do know, feel free to enlighten me in the comments.

# Pensions

A lot of employers will offer full time employees a pension scheme. This is an area I am not as clued up in as I should be, but I believe the idea is that you give your money to a private company, agreeing not to withdraw it for many many years, and they will attempt to use that money to make more money, offering you a higher-than-inflation interest rate on your investments. Some pension schemes allow you to say how much risk you're interested in taking, the idea being that higher risk will yield you a higher interest rate but with a greater chance of loss.

The part of this that scares me is I'm not sure what the guarantee is of my money being there when I reach the age of being able to withdraw it. I have three pensions (two previous jobs and my current one), all of which sent me a lot of documentation to read and, of course, I didn't. I should do that at some point.

# State Pension

I can't tell you much more than you'll be able to read on the gov.uk page about state pensions. Think of it as the same as the above, but it's public instead of private. They're mostly uninteresting apart from one thing: I pay far less National Insurance than the government claims they will pay me state pension. This feels like a dangerous game to play. I'm assuming the idea is that you should be retired for less time than you're working, but plans to increase retirement age might be an indicator that this hasn't worked out as planned.

# Salary Sacrifice

Some companies might allow you to partake in a "salary sacrifice" scheme in order to pay more into your pension. The idea is that you reduce your salary but your company promises to pay money equal to the sacrifice into your pension. Doing this allows you to avoid paying tax on that money. It's totally legit and can be mutually beneficial.

There are things to keep in mind, though. For example, reducing your salary might negatively impact your ability to get a loan or mortgage, because on paper you now earn less money. You'll also be paying less into your state pension. Make sure you do all of the mathematics and weigh up the pros and cons before going ahead with a salary sacrifice.

# Stock

This is a juicy and misunderstood topic. I'll clear up the first gigantic misconception: stock options and actual stock are not the same thing.

But first, what is stock?

Companies sell stock as a way of gaining "capital" (fancy word for "money" in this context). In return, the people that buy the stock get a small ownership of the company depending on what percentage of stock they purchased. This ownership could allow them to have a say in the direction of the company through voting. More commonly, though, stock is traded by people on an "exchange" in order to try and make money. They're also given out to employees of a company as a way of spicing up their compensation package.

Stock options are the right to buy stock in a company at a price set by the company. For public companies, this will be a rate lower than the current market value (otherwise what's the point?) and for private companies this is the ability to buy stock in the company before it goes public (allows anyone to buy stock), thus potentially being able to make some money off either the company going public or getting acquired. The initial (or "strike") price of stock in private companies is determined by the estimated worth of the company divided by how many overall stocks are issued.

Just to reiterate: if you join a company and get given stock options, you haven't actually received anything. You need to "exercise" your options by buying some stock in order to actually own something.

It's extremely unlikely you will be given stock or stock options immediately. You will typically receive your stock slowly and over time, this is called a "vesting period". The idea of offering employees stock is that it's an incentive to stay longer and work harder. The harder you work, the more the stock value rises. If the stock value consistently rises, you're profiting just by being around. This is why stock is often referred to as the "golden handcuffs". Be careful what you do in the name of stock. Staying somewhere you hate "because I still have stock to vest" is a slippery slope.

Actual stock (or "stock units") are what you have after exercising stock options. Alternately, some companies will give you stock units instead of stock options as part of your compensation package. Usually this is awarded as part of your income and gets taxed at the current strike price as if it was just money.

"But Sam, if I'm not instantly selling the stock how will I be able to pay the tax on it?!"

I'm glad you asked. Companies that offer stock units will often pay the tax on them for you by taking back some of the stock. So you're essentially paying the tax on the stock with the stock. Which is kinda neat. The alternative is that you would have to pay the tax with your salary, which may end up in you receiving a negative salary!

I'm afraid I don't know the details of what happens if you own stock in a private company that gets bought by another company. I believe there are a variety of different types of acquisition and some of them result in you getting the opportunity to sell your stock and others don't.

If you own stock in a public company, though, and you want to trade it on the market you're entering into the realms of...

# Capital Gains Tax

Yep. More tax. In terms of stock, you will have to pay capital gains tax on the profit you make from trading the stock you own. Similar to income tax, you have an allowance in which you will not be taxed, which was £11,000 for the 2014/15 tax year. Any profit over that is taxed at either 18% or 28% depending on your income tax rate and the value of the gain being taxed. Full details can be found here. For now, let's assume 18%.

This is probably lots to take in, so let's have an example. Let's say you buy 100 stock in Amazing Company X at £10 each. You wait a year and all of a sudden the market value of the stock is £20! Awesome. You sell everything and make a profit of £1000. Because that's below your allowance, you won't have to pay any tax on it.

If, however, the new stock price is £200, your profit will be £19,000. Subtracting your allowance of £11,000, you'll have to pay 18% tax on the remaining £8,000. So £1,440 in tax. Still a sweet £17,560 in profit, though.

"Wait, what if the stock price goes down?"

It's not a total loss if this happens. You can use loss to offset any other profit you have from capital gains in that tax year. So if you're trading in multiple stocks and one of them loses you £1,000, you can use that £1,000 to increase your tax-free allowance on the stock you profited on.

Another example required? All right.

You buy 1000 stock in Amazing Company X for £100 per stock. You buy 100 stock in Terrible Company Y, also for £100 per stock.

A year passes, Amazing Company X now has a market value of £200 per share! Woot. But oh no, Terrible Company Y went bust. Their stock is now worthless. Let's work out where this leaves you.

You've made a profit of £100,000 with Amazing Company X but a loss of £10,000 with Terrible Company Y. We can use that £10,000 loss to increase our tax-free allowance to £21,000 and instead of paying 18% tax on £89,000 of the profit we made from Amazing Company X, we only have to pay 18% tax on £79,000 of it.

# Bonuses

Some companies may offer you a bonus, usually a percentage of your salary each year. The terms and size of bonuses vary greatly, the important thing to keep in mind about them is that they will be added to your income and taxed accordingly.

Don't count on a bonus as part of your stable income. They're almost always given out at the discretion of the company and you're not guaranteed to receive all, or any, of your bonus.

# Time off

Not quite directly related to money but I felt it was worth a mention anyway. It's a good idea to work out what an hour of your life is worth to you, it comes in handy in all sorts of calculations. For example, is it better to travel a long distance by bus, train, or plane? Each form of transport has its pros and cons, one of the big ones is time. Knowing what your time is worth helps you make a meaningful choice about which to choose.

To work out your hourly rate, take your salary and divide it by the number of working days in a year multiplied by the hours per day you work. For most people this will be 253 * 8, which is 2024. Whether or not you feel like this number accurately represents the value of your time is entirely up to you. Personally, I value my time outside of work higher than my hourly rate, which leads me to make decisions that skew in favour of my personal life.

According to the government, you are entitled to 28 paid days off per year. Sadly this does includes bank holidays, so employers can get away with giving you as little as 20 days off per year, as there are 8 bank holidays in 2016. Don't sign a contract that offers you less than this.

# Wrapping Up

Money is complicated. What I've presented here should be enough for most people just starting out, but there are dark and strange corners of the financial world I don't understand at all and will hopefully never have to.

For the time being, I hope this puts you in a better position to make meaningful choices about the compensation you receive. Go get 'em! :)