As students start college or university, they will have a lot on their plate and hundreds of big and small things to deal with. It is an exciting time, but for some it can be overwhelming. For new students, there are all the aspects around getting to know others, living in a new place and not to mention the harder course work. Something that easily can slip by in all the hoopla is ensuring that they are on top of their finances. Why is this important? Well, here are 7 reasons why students must pay attention to their finances or face years of financial angst long after they leave school.
1. Fail to Budget. Most students have never kept a budget before because there has never been a need. However, now that your financial future is firmly in your hands, keeping a budget is essential. A budget should be simple and primarily consist of tracking 2 things – money coming in (income) versus spending (expenses). Your income is normally limited to what your parents provide, part time work or a scholarship. Your biggest challenge will be controlling your spending as college living costs can add up very quickly. Throw in the costs of socializing and transportation and you may find yourself living well out of your means. That is why almost one-fourth of undergraduates have credit-card debt in excess of $3,000! Budgeting will help you keep track of your expenses and give you an idea of on what and where you are spending money. Make sure you divide up your budget expenses into mandatory expenses (books, food etc) and discretionary expenses, which include parties, shopping, dinner out etc. It is the discretionary expenses that you will have to control and cut back on if you are spending more than your means. Also make sure you track how you pay for each of the expenses to know how much you are putting on credit cards versus paying by cash. The easiest way to do all this is in an Excel spreadsheet and use color coding to indicate how an expense was paid for. See this article for more on how I set up a budget in Excel. Keeping and sticking to your budget will be challenging and it is okay to expect variances as you get used it. However, once you master it and effectively use your savings for investing, you will financially set yourself ahead of most other people for the rest of your life.
2. Fail to set up a saving accounts and earn a whopping 0.2% in your checking account. This is no-brainer. If you have savings or are able to generate sufficient savings, do not just leave them sitting in a standard checking account earning a miserly amount of interest. Make sure you move the majority of your savings to a high yielding (FDIC insured) on-line savings account. Two that I recently reviewed and like are saving accounts from HSBC and ING. Both are good choices for students and have no account keeping or transaction fees. Link them to your regular checking account and you can easily move funds between the savings and checking accounts while earning 3% or more in interest. For $2000 of savings, the interest can cover your trip to the movies once a month. Not bad for a few clicks on-line.
3. Repeat the same mistakes as others. Despite what you may think, your parents have much more good and bad experience when it comes to personal finance. If you were like me, you probably thought you knew it all when you got to college and felt very confident in yourself. Well, you may be in for a shock, especially when it comes to finances. The financial jungle out there can be very confusing and there are a lot of smart people and companies trying to sell you things you may not need. Avoid impulse financial decisions at all times, because once you sign a contract it can become a costly exercise to get out. So rather than repeat the same mistakes as your parents or others who trod in your place before, take heed of the lessons you learn and seek out good information/advice at all times. If you get a chance, take a personal-finance class or see a financial planner or counsellor. Most good colleges offer this is as a free service so take advantage of it where possible. There is also a lot of useful information available online that can help you make your decision in choosing a financial product or service. In fact at last count there were over 100 quality personal finance blogs specifically catering to students that I know of. The final decision is yours though, so make sure you make an informed one.
4. Collect Credit cards (and debt). You will be bombarded with credit card offers at your college and via mail. In fact some offerings will be so enticing, like a free iPod or cash back rebates, that it will be hard to resist signing up. The marketers are very convincing and are often current or past students that spin you stories about how easy credit cards will make your life and that you can easily cancel after a few months – which rarely happens. For many this will be the first time they qualify for their own credit card and the smooth talk and free “gifts” will probably mean students sign up for more credit cards than they need. Credit card companies have perfected the art of student marketing in the last 10 years so don’t think you can outsmart them. My advice is determine what you will need credit cards for (do you really need one?) and then go on-line to site like bankrate.com to compare which credit cards meet your needs.
If you expect to carry a credit card balance for the first few months when setup expenses are high, then pick one that has 0% APR introductory offer. Make sure however that you pay the outstanding balance off before the introductory period ends. The first credit card you sign up for will probably be one you keep for a long time (that’s why credit companies try and get you in school), and the usage habits you have will follow you when starting working life. So be smart and controlled with your credit card usage and they can be a great financial tool for you in the future.
Finally, be aware of recently enacted credit card rules that require anyone under 21 to prove that he or she can repay the money before being given a card, or have a parent or guardian promise to pay off the debt if he or she defaults. This may make it harder for new college students to get a credit card (a good thing overall!)
5. Piling up College Debt. As a nation our savings rate is on the rise due to a brutal recession that has taught many Americans the virtue of frugality. However one group is still piling on the debt – students. This is in large part due to the rising costs of tertiary education, but has been compounded by bad personal finance habits. The amount of money students borrow has long been on the rise and debt has become commonplace in paying for higher education. Today, two-thirds of college students borrow to pay for college, and their average debt load is $23,186 by the time they graduate. For students going to ivy league universities or undertaking a graduate degree, the amount of college debt could be well into six figures. This is where practicing the tips in this post and taking a real focus to pay off your debts sooner rather than later, is crucial to ensuring that there is hope for a normal life after graduating.
6. What’s wrong with 3 part time jobs? Extra money is great while at college, and necessary in some cases, but don’t forget why you are here – to learn! When I was in college (or university as I called it) I knew a class mate who had 3 part time jobs (2 night jobs and one daytime retail role). This was great for his cash flow and he was always the biggest spender of the group. It also made him popular with others who would count on him for a round of drinks whenever he was at the bar. However, he sacrificed valuable study time for working (and maintaining an active social life) which meant he fell behind in his studies, including missed classes. He finally got back on track when he had to repeat and pay again for the entire semester, but still graduated a year after the rest of us. In financial terms, the opportunity cost of graduating a year later is equivalent to one year of salary from a full time job and the additional tuition costs – far more than most part time jobs are worth. Also you will be one year behind your peers in experience and top employers prefer not to hire students with poor grades. Money from part time work is great in the short term, but don’t over do working while at college because you could be sacrificing much more in the bigger scheme of things.
7. Have all the local takeaway numbers on speed dial. Takeaway food is the staple diet for a number of college students, because it is fast and convenient. However, as food prices rise due to inflation and other factors, this can become an expensive way to live and blow a hole in your budget if you eat out regularly. It can also become a habit, and I speak from my own experience, that can follow you long after you leave school. If you have the opportunity, learn how to cook (see 10 frugal and healthy recipes). Take some classes or learn from your roommates. Even better, learn at home before you start college – you only need to know a few dishes to get by. Cooking at home means you will have more control of your food finances and hopefully lower your eating/dining out costs significantly. It is also a big plus point for impressing someone on a date!
Financial habits and decisions you make today will have a lasting impact on most of your adult life. So rather than be a college graduate struggling to get out of debt long after you leave school, be responsible and proactive by making informed financial choices now. It’ll be worth it.
Photo courtesy : Dimitry B
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