Financial Tips for College Students: What I’ve Learned
The sooner you start practicing smart money habits, the better.
If I could go back in time, there are certainly a few things I would change, people I would treat differently, and so forth. I’d also manage my finances better. Unfortunately, this isn’t possible so I will settle for sharing a few pieces of advice for those of you who are just getting started on your financial journey. Whether your family lives paycheck to paycheck, you just started working, or you’ve never had to worry about money, the best thing you can do is acquire knowledge.
Below, I’ll provide 6 lessons I learned by the time I graduated college, but wish I had known much sooner.
1. Start Saving As Soon As Possible
Easier said than done? Everyone’s situation is different and all students aren’t fortunate enough to save much, if anything at all. On the other hand, I’ve come across students who joke about being broke, but eat out every week, and take vacations every chance they get. If that’s you, pay attention!
It’s important to save where you can. I started by saving my $20 monthly allowance that I received when I was in high-school and quickly learned that between birthdays, Christmas, and my allowance, I could build a little stockpile to buy the things I wanted (cheap watches and fast food). Getting into a habit of saving my money makes it easier to set money aside as you make more. Automating your saving, by directing a percentage of your checks to a savings account, or saving a predetermined amount on a regular basis, is also a very smart tactic. For instance, 10% of each check I earn goes directly to my 401k.
A part-time job is a great way to start saving.
I grew up in a middle-class family. My mom is a nurse, and my dad worked as solid waste engineer for a few decades, and while they never forced me to work, I always wanted to be financially independent from them. From high school to college, I held three different jobs; Big 5 Sporting Goods, Nordstrom, and an internship at Merrill Lynch. During the summer of my junior year in college, I would work 3-4 days at Nordstrom and 3 days at Merrill Lynch. During school, I’d work about 25 hours between the two jobs. I lived with my parents at the time (still do) so it was easy to save.
I saved just about every penny from my days at Big 5 so despite my erratic and sometimes irrational overspending during my college years, I always had a little money set aside. With very limited expenses, I had free reign over my money. Despite this, I did not make frequent purchases and sacrificed plenty of my free time to work (realized it was harder to spend money if I was always working). I enjoyed watching my bank account grow, and was constantly setting new savings goals.
As you’ve probably found out, it is much harder to make money than to spend it. When you start spending money with no control, it is easy to establish a habit of overspending. Whether you start by saving $20 a month, or $100, it really adds up. The most important thing is that you START.
I went from saving $4,000 when I graduated from high school in 2015, to having over $20,000 by the time I was a senior in college. Less than a year later, I had doubled that. Next, I’d like to hit $100,000.
2. Create a Budget
A budget is the simplest way to begin to understand your personal finances. What is a budget? Think of it as a plan on how to spend your money.
To get started, figure out how much you make in a month/year, and how much you spend. Be sure to make note of any fixed expenses like car payments, or rent. By tracking your spending, you’ll see where your money is going (e.g. how much you’re making vs. how much you’re spending). Let’s be honest, most people can probably cut back on dining out! Whether it’s Chick-Fil-A, or weekly lunches at your favorite food spot, it adds up. Recognize areas where you are overspending and begin cutting back.
“Budgets Expose Excessive Spending, Which Lets You Stop It”
It is important to track both income, and expenses because this will allow you to identify how much you can save, and invest. For instance, let’s say your monthly net income is $2,000. This means that after taxes, you earn $2,000 a month, and $24,000 every year. Your rent, a fixed expense, is $700/month, and between groceries, gas, entertainment, and school supplies, you spend another $400. In total, you’re spending $1,100/month. This means you have $900 a month that you can save or invest. That’s almost $11,000 a year! Please note, that is just an example.
Let’s be honest, budgeting is hard! Unexpected expenses occur, emergencies happen, and it’s difficult to track every dollar you spend. To make things easier for myself, I’ve begun using the Mint app, which starts by looking at your past 3 months of income and expenses (based on bank account transactions), and creates a budget for you. I’ve edited my budget a little bit but here is my budget breakdown for April 2020:
The total for my monthly budget is $1,206. Of that, I’ve used $79 so far. The amounts budgeted for my student loans, and my car payment are fixed, monthly expenses that occur on the last week of the month. This current budget allows me to save over 70% of my income. In reality, because I live at home, my budget should be much smaller. Just by this quick look at my budget, you can tell that I can easily decrease my spending around food and clothing to save money.
It is very helpful to create a visual for your spending because I am sure you’ll be surprised by how much you actually spend. Budgeting requires you to be proactive. Don’t spend irrationally, and don’t make impulse purchases. Provided you do a good job of saving, budgeting will become easier over time.
Read more: Getting Started With Budgeting
3. Begin Building Your Credit
Credit is a crucial part of financial wellness that is overlooked. Your credit history is used to determine your eligibility for loans when you attempt to buy a house, or even when you go to buy a car. It might be easy to tell yourself that credit doesn’t matter now, but a solid credit history will be of great benefit to you in the future.
What Is A Credit Card?
A credit card is a form of payment that allows you to borrow money in order to make purchases. Your income, and net worth (what you own minus what you owe), will affect the credit limit that you’re provided because it is used as an indicator of your ability to pay back any loans. Some of the perks of a credit card are:
It allows you to generate rewards
You can establish a credit history and credit score (which make it easier to buy a car, a house, or rent an apartment)
When you go to buy a car, or a house, one of the first things that is looked at, is your credit score. The higher your credit score, the lower your interest rate on any loans you take out. Also, with a greater credit score, you can place lower down payments.
Read More: What Are the Requirements for a Credit Card? and Credit Cards 101
Why College Students Should Open Cards
Don’t think of a credit card as free cash, because it is not. When considering if opening a card is good for you, it’s important to consider your current financial situation and employment status. Where a lot of people go wrong is that they use a credit card to pay for items and luxuries they can’t truly afford. Or, they open multiple cards, and max them out. It is important to use the card for items YOU CAN AFFORD.
One important lesson I’ve learned is that credit card utilization impacts your credit score. Utilization is how much of your credit allowance you use. For instance, if your credit card limit is $1,000 and you charge a $400 plane ticket to your card, your credit card utilization is 40%.
A credit card utilization rate of over 30% will have a negative impact on your credit score.
I learned this the hard way when I charged $800 to my credit card (my limit was $1,000). I paid off the balance the next day but noticed when I got my credit report, my score had gone down. Do not let this be you.
The Importance of Utilization: Understanding Credit Utilization
When I went to buy my car, there was a lot of discussion on income and credit history. I had good credit, but I didn’t have a long history and had only used my credit card for items like gas, and groceries, so I was going to get a higher interest rate. Luckily, my dad co-signed on the car, and his credit is close to perfect, so I was able to get a lower interest rate on my loan.
I say that to say this, it is never too early to start building credit.
So, whether it is today, next month, or next year, start looking at your options! Work towards understanding the role credit plays, and how to avoid getting into debt.
Read: Seven Things to Consider Before Opening A Credit Card
4. Start Saving For Retirement
You’re probably thinking “Why would I save for something so far away?” Well, I can answer this is one word - compounding. Numerous research efforts have proven that the best time to start investing and saving for retirement is while you’re young in order to take advantage of the power of compounding. The later you start investing, the less your money will grow.
The table below shows the importance of investing while young, and regularly.
In the graph above, you can see that Chris who starts investing while young, and invests regularly from age 25 to 65, makes the most money. More importantly Susan, who invests $5,000 from age 25 to 35 every year, ends up saving more money than Bill, who invests the same amount from age 35 to age 65.
This is because of the power of compounding! The more time you give your money to grow, the more impact your investment will have over the long term. Despite Susan investing only 1/3 the amount of Bill, and for 1/3 of the time, she still ended up with more money.
Now imagine if you start investing earlier than 25. I started investing when I was 18 with $100. I am now 23 years old, and with regular contributions to my retirement, and brokerage accounts, I have now managed to increase my investments to over $40,000.
Read: Advantages Of Investing In Your 20’s
5. Develop An Understanding Of Student Loans And Their Impact
Student loans might seem like your only option if you can’t afford the full cost of tuition but it is becoming increasingly important to look at other options.
Take the time to look at available scholarships and grants that will cover some or all of your college expenses. Note that this is no easy feat and there are tens of thousands of other students also attempting to secure scholarships to attend college.
If you have to take out student loans, be sure to understand the difference between subsidized and unsubsidized loans. I took out unsubsidized loans while in college and I wish I had started paying them off early to reduce the amount of accumulated interest.
Read: Types of Student Loans
Be sure to know when interest will begin to accumulate on your loans, and when you will be required to start making minimum payments. Most importantly, ask yourself if it is worth it! Ask yourself how much debt you’re willing to take on for your desired career path. It is possible that you may be taking on more debt than you can pay off in a reasonable amount of time because jobs in your desired career path are limited, or it pays a low salary.
Do your research.
6. Create An Emergency Fund!
An emergency savings fund is meant to be used to cover the cost of any unexpected emergency. For example, losing your job, a car accident, a lost laptop, etc. This amount should be separate from your savings account and should not be touched unless it is for expenses related to an unexpected emergency.
Setting up an Emergency Fund will prevent you from digging into your savings for unexpected bills, or emergencies.
Watch: The Importance of Saving For A Rainy Day
Thanks for reading! If you’ve got questions, please email me at obiohaokereke1@gmail.com.
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