Paying taxes, saving for retirement, putting a down payment on a house—these all seem so far removed from the everyday world of college life that it’s almost laughable to be worried about them. But these are hugely important financial decisions that many people struggle to deal with their entire lives.
It’s easier to make good choices with your money later in life if you learn how to do it the right way as early as possible. And while buying a house might not be something on your mind for at least another decade, the financial habits required to pay for one can be developed right now, even while you’re still a student.
Why it’s important to start now
In fact, the financial habits you’ll need to successfully manage your money are quite simple for collegiettes to learn. “It’s budgeting, saving, keeping track of your credit,” says Sherrie Clayton, director of the Personal Finance program at Duke University. “If you get in the habit of managing that now, it will make it easier for you when you get a job and have a more substantial salary to work with.”
And if we’re going to talk consequences, note that worrying about your money and finances can also have a detrimental effect on you personally. “It puts you in a stressful situation and can start to affect your health,” says associate financial advisor and wealth management specialist Rani Goodman.
Being financially sound isn’t just about money; it’s about investing in your future. The sooner you start to get serious about your cash, the better. The financial habits you form now will help you later on, when you’ll be managing a lot more than meal plans and nights out with friends. Here are five areas where you can start practicing good money habits while you’re still a collegiette.
1. Budgeting
The very mention of the word “budget” can strike fear in our hearts, but sticking to a budget is the first step in securing your financial future.
“The thing is to try to make sure not to spend more money than you’re taking in,” says Goodman. It sounds obvious, but unless you’re keeping track of everything you’re both making and spending, chances are, you’ll end up spending more than you should be. “We have to look at how much we’re spending, and if we’re spending beyond our means, then we need to curb that a little bit,” she says.
If you always find yourself scrounging for extra cash at the end of every month, then learning to create and stick to a budget should be a priority. You want to make sure that you are comfortably living within your means, if only for the reason that you won’t worry about having to live off of ramen for a week.
How to do it: A budget is an estimate of how much money you’ll have to spend for a set period of time. It details how much money you have, how much you’re getting, and how much you’ll need to spend on things like bills, loans and entertainment.
“Your budget should include all your sources of income,” says Beverly Harzog, credit card expert and author of The Debt Escape Plan. In addition, it should include what expenses you’ll have to pay for a certain time period—usually a month, or a year. These can be one-time expenses, like a trip to the movies, or recurring expenses, like your monthly phone bill.
You can create your budget using a simple excel spreadsheet, or you can go hi-tech and use software to help you out. Mint.com is a popular option for doing this. “It’s free and you can set up a budget and track your spending,” Harzog says. “But there are many money management websites and most of them are free.” Other sites like Feed the Pig and Smart About Money also help you track your spending and create your budget, so find one that is most appealing to you.
Once you’ve decided how you’re going to keep track of your budget, creating it is as simple as figuring out how much money you have to work with for the month. “Figure out how much you’re taking in and how much you have to spend,” Goodman explains. Begin by listing out all your sources of income. During the school year, this can include everything from your meal plan to scholarships, and in the summer, income from a part-time job or an internship.
Then, list out how much money you have to spend each month. This could be phone bills, prescriptions, credit card bills, rent payments, or any number of things. Once you’ve got the necessities out of the way, list out how much you plan on spending for other things, like shopping or going out to eat.
“Be as specific as you can,” Harzog suggests. “Instead of a line item called ‘Entertainment,’ specify the type of entertainment.” For example, if you know you go to the movies a lot, then put ‘Movies’ in as a separate category and list out how much money you expect to spend on them for the month. This helps you get an idea of how much you’re spending on specific things and can help you adjust that spending if you’re too strapped for cash. “If you look at your movie expenses for the month, for instance, you might decide you want to spend less in that category,” Harzog explains. “So a detailed budget helps you know where your money is going, but it also helps you reassess how much you want to spend on certain things.”
Once you’ve figured out your budget, you can adjust your expenses and cut back on spending to accomplish another goal—saving up your money.
2. Saving
We know that we’re supposed to save our pennies for a rainy day… but sometimes it’s hard to imagine that the rain will ever come! Until it does, and your car breaks down, or you lose your phone and need a replacement. Where’s that last-minute cash going to come from?
Your emergency savings account, hopefully! “Your savings is the money you are setting aside because you are going to use it, maybe in the near future, maybe in the not-so-near future,” Clayton explains. “If your car breaks down and you need to fly home, or you have a medical emergency and you need to pay a doctor’s bill, [your savings account is going to be your lifesaver].”
Getting into the habit of saving money is almost as difficult as tracking your spending to create a budget. But Clayton urges students to remember that it’s never too late to start, and even saving a little bit is a good start. What’s important is that you start.
“You are the most important part of your finances,” she says, “so you should be paying yourself first. That is one of the most important things you can do. It doesn’t matter how little or how much you are saving, just get into the habit of putting something aside.” This way, when you graduate and really need to start saving for bigger things—like retirement and your first house— you’ll already be in the habit.
How to do it: So how much should you be saving, and how often? “There’s no magic number when you’re in college,” says Harzog, “because you already have so many expenses and the amount you can save will vary by person.” For now, Harzog says, you really shouldn’t stress over the exact amount.
Simply state how much you are going to save, and how often, then stick with it. This can be a dollar a day, a dollar a week, or ten dollars a month. “Whatever it is,” says Clayton, “start putting a certain amount of money away in certain increments.”
You can also make saving easier by automatically transferring a certain amount of money to your savings account. “Most banks will allow you to automatically take money out of your checking and deposit it into your savings, so you don’t have to think about it,” Clayton suggests. This is especially helpful for collegiettes who may have trouble remembering to save up on their own.
If you want to save a little extra, Harzog suggests you put your emergency fund in what is called a high-yield money market account. “It’s better than a plain savings account at a bank,” she says, because these accounts earn interest on the money that’s in them. Harzog lists Ally Bank as a popular choice, for its 0.99 percent high interest rate and its lack of fees and a minimum deposit, making it a great choice for those just starting to save who may not have a lot to start with.
Harzog says there are also many online savings accounts for students to choose from, and encourages collegiettes to find one that meets their needs.
3. Credit
Credit may not seem like something a collegiette would need to worry about. And Clayton agrees: “The only reason you need a credit history, or a reason to build credit, is if you want to get a loan, to purchase a car, to purchase a home. It can also affect your security deposit if you go and rent an apartment.”
These things may not worry you now, but as you get closer to graduation (and in need of a car and a place to stay) you might wish you took the time to build credit while you were still in school. Something as simple as renting an apartment after you’ve graduated can be extremely difficult if you don’t have a credit history already established. However, the tricky thing with credit is that you need good credit to get more credit.
How to do it: It can be difficult for you as a student to simply go out and apply for a credit card, because many credit card companies won’t issue cards to college students out of fear that they won’t be able to pay back the loan. “If you don’t have credit, you probably won’t qualify for a credit card, although it depends on the company,” says Clayton. But if you want to start building credit while you’re still in school, there are a couple ways to go about it.
One way is to become an authorized user on a parent’s credit card account. Your name will be added to your parents’ existing account, which allows you to piggyback off of their credit score. If they have good credit, it boosts your credit score as well. Once you’ve done this for a few years, you may be eligible to apply for a card in your own name.
If you’re not in a situation where you can become an authorized user on a parent’s card, another option is in the form of a secured credit card. This is a card that is issued through your bank itself. You give them a deposit of a certain amount of money—say $500—and this becomes your “credit limit.”
“Usually when you get a loan, there is some sort of collateral,” Clayton explains, “like when you buy a home and, if you don’t pay your mortgage, the bank gets your house back. With credit cards there is no collateral, so with a secured credit card, you give them collateral in the form of money.” This is an easy way for a student with no credit history to start to build up credit.
Secured cards are also a great way to learn how to build credit because you can’t really get into trouble with them. “This is probably the best way for a student, because you can’t charge more than the money you already put down on it.” Use the secured card to build your credit without the fear or ruining your credit history and compromising some of those big-ticket items you’ll need in the future.
4. Loans
With the shockingly high cost of tuition these days, many collegiettes will need to subsidize their education. While scholarships are the ideal way to do this, if you don’t have enough, then you may need to take out student loans.
Your student loans are going to be a priority to pay off once you graduate. Most loans will give you a grace period of six months after graduation, to help ensure you’re well on your feet before you have to start paying them back. But a lot of loans also start to accrue interest while you’re in school, so that you can end up paying off more than you took out in the first place.
This is why you need to understand the terms of your loan while you’re in school. “You need to know your required loan payment before you even take out your first loan,” Clayton stresses. “Each year it is a good idea to do a financial health check to see how much you have borrowed, what the payment is going to look like when you graduate, and whether your profession is going to allow you a salary that can support that loan payment, plus your other expenses.”
Once you graduate, you may have to take out loans for others things—like a car or a mortgage on a house—so you need to learn how to plan for and manage them now. Your student loans are a great way to do that.
How to do it: Many federal student loans require you to have loan counseling so that you understand the terms of your loan and what you need to do to pay them back. “You need to understand your loan interest and how much your monthly payment is going to be, even if that is four, five or six years down the road,” says Clayton. “If nothing else, keep in check how much you are borrowing so that you know if you can afford that loan payment after graduation.”
If you’re struggling to manage your loans or are unsure about how to plan for their repayment, definitely visit your school’s financial aid office and talk with a counselor. They are there to help you manage your financial aid and can help you figure out what will work for you, especially if you’re a first time borrower.
5. Taxes
Most college students are not required to file taxes. This is because our parents can usually claim us on their tax returns; we are still considered “dependents” if we go to school full-time or if they provide more than half of our financial support for the year. You also don’t need to file taxes if you make under a certain amount of money per year. Still, learning to do your taxes while you’re still in school can help cut down on a lot of stress after you graduate, when you may have to take more things into account than just your part-time job at the school bookstore.
If you are working part-time on campus, then you definitely should file your taxes, because the government could actually owe you money! “You can get what you owe to the government taken out each month,” says Clayton. “You may be owed a refund, so you may want to file even if you are not required.”
How to do it: To figure out whether or not you should file your taxes, the IRS has a tutorial on their website to help walk you through this. Answer these questions if you’re not sure if you should file or not.
If you’ve decided to file your taxes, the IRS website also offers a list of tax service providers who will help you file your tax return online and for free, such as TaxSlayer and ezTaxReturn. These are fairly simple programs that will ask you questions and guide you step-by-step through the tax filing process. Some of the offers differ by age, state and income, so be sure to check to make sure you are eligible for a particular free software before you file.
Taxes may seem daunting, but if you have some extra money coming in at the end of April, it’s totally worth it!
Getting control of your money can seem overwhelming, but don’t get discouraged! “Don’t get bogged down in the details of it,” says Clayton. “If one thing doesn’t work one month, try something else. What’s important is to make sure you are managing your finances yourself.”
Later on in life, it’s going to be important for you to understand how your money works and where it’s going. While good money habits are difficult to form no matter what, you’ll thank yourself later for taking the time out now to get used to managing your money yourself. Your money situation will change with you as you graduate and move on to the real world, so keep your chin up and keep at it!