College Students and Their Money!

Most young adults enter college and have no idea of how to handle their money. While they are prepared for almost every other area of college life, the one thing that they have not been prepared for is handling their own money and finances.  College is one of the first times that students get to test their independence, and their finances are a major part of this independence. Understanding their finances can set them up for future financial success and can help them avoid a future financial mess.

Part 1 of what College students should know about money and personal finances.

1. Don’t use social media as your standard of living.  Too often people use what they see on social media as a way to live their life.  Social media is not reality.    Others put out what they want you to see, but you rarely see what that they did to get it, or how they are paying for it.  Understand that someone else’s money and financial status is their money and status.  Work on getting and keeping your own money instead of trying to keep up with the next person's status. 

2. Understand the impact that credit cards can have on your finances.  Credit Cards are useful if you use them wisely.  The pain from the misuse of credit cards can last for years. For example, if you charge $1,000 on a credit card that has an interest rate of 13%, it will take you approximately 5 years to pay off and will cost you approximately $850 in interest.  It nearly doubles the original cost of the item.  Also, when you have a balance on your credit card, be sure to pay the bill every month and be sure to pay on time.  Paying late or missing payments has a negative effect on your credit score.  When initially getting a credit card, opt for a card that has a low interest rate and no annual fee. Your goal is to be a responsible credit card holder so later when you need the credit to buy a car or house, you can quality for the best rate. 

3. You are never too young to Save and Invest – Many believe that investing is for older generations.  Truth is, with the right job and right investments, if you invest approximately half of your paycheck starting at age 21, you can retire by age 45! Could you image not having to work at such a young age?  Take a look at how investing works.  Assume you save $100 a month in a savings account or stock market yielding about 6% interest a year; after four years you’d have about $5,600 dollars saved up.  Or, let say you invest $2,000 when you are 17 into an account that yields a 6% yearly return.  If you never make another deposit in this account, by the time you are 40 you would have earned approximately $7,700, and by the time you are 65 you would have earned approximately $33,000! All from investing $2,000.  

4. Know the difference between compound interest and simple interest.  – When you invest your money in any account, know that compound interest generates more money than simple interest.  Compound interest is calculated on principal and accumulated interest of previous month.  Basically you get interest, on interest.  Simple interest only calculates on the principle.  Lets say you take that same $2,000 from above, and invest it in an account that does not compound interest.  Using the same 6% interest rate, that one deposit of $2,000 would only give you $4,800 by the time you are 40, and $7,800 by the time you are 65.  You are still generating money, but compound interest is truly a better investment.

5. Financial Institutions exist so they can make money.  Banks and Lenders prey on college students. They make money by giving to you.  Whether they give you a credit card, a loan, or you open a bank account with them, they make money, so be careful.  Be mindful of fees that are associated with their products.  They can be expensive and can sneak up on you.

6. Be prepared for emergencies.  Once you start college, and as you get older, understand that you need to rely less on your parents. Establish an emergency fund for yourself.  Your emergency fund shouldn’t be a line of credit; it should be cash. 

7. Trying to live like the Kardashians can ruin your life!  As a young adult your main goals are to fit in with your peers, which is why you think so much about what others think of you.  Set your own goals of what you want out of your money and life, and live accordingly.  Do not live your life based on what someone else is doing. Do you!

8. Establish a budget.  Yes, I know the word budget is not your favorite “b” word, but I promise the earlier you start to understand that budgets can help you, the better.  Budget is another word for spending plan.   Spending plans help you spend your money wisely.   Make sure you periodically review your budget and spending habits to make sure your budget is helping you accomplish what you want to accomplish. 

9. Be Smart when buying a car. For most young adults buying a car is one of their first major financial decisions.  Understand that a car depreciates at a rapid rate.  Buying a $25,000 car while in college may not be the smartest decision.  Your goal should be to buy a reliable and affordable car.  The ultimate goal is to buy it in cash.  For many that is not possible, but understand it is not impossible.  If you establish a budget to save your money you may be able to use cash to purchase a safe, reliable car.  If you are unable to use cash, try financing the smallest amount possible with the lowest interest rate.  If you get a car note, pay it off as quickly as possible.  

10. There is good debt and bad debt.   Sometimes debt is unavoidable so chose your debt wisely.  The goal is to stay out of the most expensive form of debt.  High car loans, high interest credit cards used to purchase clothes, shoes, accessories, etc. are examples of bad debt. Investments and real estate are examples of good debt.  Try to understand when to use debt and how you will manage it.

11. Don’t be afraid to ask questions about money – There is a lot to know about money.  Part of the reason that college students make poor financial decisions is because they simply don’t know how to make smart financial decisions.  If there is anything about money or your finances you don’t understand, ask questions and research!  Ask about whatever you need to know to make sure that you are equipped to make good financial decisions.

For many young adults, college is the first step to independence, including financial independence.  Since money matters are not taught in school, you need to make it a point to understand how to manage your money.   College students are in the perfect position to start building wealth.  Most of you have minimal responsibilities, so you can make saving and investing a priority.  If you as a college student understand just a few basic personal finance concepts, you will be better off during your college years, and be in a great financial position as you head out into the real world.  Being mindful and learning good money practices in college can help you in the long run!