Four Financial Basics for College Students

Across the country, there are only 13 states that require personal finance course instruction, either as a separate class or as part of their economics curriculum, to earn a high school diploma. The result is that many students arrive at college without any formal financial instruction.

The consensus is that there are some basic concepts every student must know to be successful. By financial basics, we are not talking about something as simple as balancing a checkbook. Instead, we are talking about decisions related to spending, especially when it comes to borrowing money.

Data indicates that very few college freshmen understand three key fundamentals: the time value of money, needs versus wants, and that one habit of yesteryear that has almost disappeared from the landscape, saving money.

Building a Budget

The first step to gaining true financial literacy is to build a budget to track your earnings and expenditures. The single biggest problem for people of all ages is the failure to understand where all their money goes over the course of a year.

A monthly budget ensures you will first understand what you will have for money coming in . When those sums are placed on paper you can begin to allocate where these funds can be spent.

When making your list of expenditures it is critical to list those expenditures that come only at specific times of the year. It is also critical to create a category for unexpected expenditures. If your computer crashes or you need new batteries for you calculator, it is imperative you have some money to solve such problems.

Most importantly, it is also critical to understand the difference between needs and wants and that wants are unnecessary expenses that can be controlled with planning and discipline.

Needs vs. Wants

First and foremost, as a student, your income will be limited – you simply will not have the opportunity to earn a significant amount of money. That said, every student arrives at college with different financial means.

Some have been provided an allowance by their parents – others must rely only on what they can earn in a part-time job or the money that they saved from the previous summer’s employment. Whatever the case, you will have mandatory expenses for books, supplies and room and board. You will also need money to pay for transportation home if you want to get to see your family during the various holidays.

At the same time, in college you will want to have some fun. You will no doubt want to join your peers when they have decided to go to a movie or go out to grab a latte.

Creating a column in your budget for pleasure activities is critical – you must balance the pressures of the academic challenges and having some fun with friends can be a great pressure reliever.

But such outings with friends can create a different pressure. Before committing to an outing with peers, you must determine if you have the money to do so. If you begin spending money that must be used later for items that you will need you will find yourself experiencing a different form of stress.

For those expenses not mandated, you must maintain your budget. If you have spent or have nearly spent your monthly allowances for the wants, you must find free or low-cost on-campus activities, whether it be a lecture, dance, sporting event, or movie.

And though it sounds like heresy, you have to be honest with your peers. Learn to say, “Sorry, I can’t afford to do that.” You will be surprised – true friends will react positively and readily consider options that are viable for you as well as them.

Compounding of Interest

Economists often talk about the rule of 70 when it comes to promoting saving money. The rule of 70 is quite simple, if you multiply an interest rate by the number of years, that is the time it will take for money to double.

For example if you invest any amount of money at 7% interest, in 10 years (10 times 7 equals 70) your money will double. So $1,000 invested at 7% becomes $2,000 in 10 year’s time.

It is important to understand this concept and how it relates to that credit card where interest rates can be 18 to 25 percent. With such numbers, what you owe can double in just 3-4 year’s time.

That is why making minimum payments on a credit card is a significant loser for anyone who charges. Before you know it you are barely paying anything on the principle or the amount owed. Instead you are merely paying the interest that has been assessed and continues to accumulate.

The same principles hold true if you feel you want to splurge and by a car. Supposed you pick out a used one at $10,000 and take out a four-year loan on the car at 8%. Your car is not costing you $10,000 – it is now costing you $13,200.

If you use a charge card, pay off the balance every month to save the interest. If you do not have the cash to buy that car, don’t give away thousands in interest payments. Use the transportation available on campus.

And lastly, think carefully about borrowing significant funds for school. Even with modest interest rates of 5-7 percent, by the time you have graduated you will owe the equivalent of five or six years of costs even if you graduate on time. If you take five or six years to earn your diploma you could end up paying double the money you have borrowed.

If you are like most college students, resources will be slim. Adding interest payments only further reduces your available resources.

Savings Accounts

Lastly, it is imperative that you begin to understand the concept of setting some money aside for that proverbial rainy day. Whether it be a bank savings account or funding the beginnings of a retirement plan, developing the savings habit is critical. In fact, this habit is likely the most important one you can ever develop

Most experts use the phrase “pay yourself first” to describe this habit. It essentially means putting money into a savings account before you become inclined to spend it.

In this case you create a space in your budget for savings and then allocate those funds monthly. This also means that you do not ever spend what you earn or what are given for an allowance.

Again, using the idea of compounding, simply putting $10 aside from your weekly earnings will result in $520 in your savings account by year’s end. As little as $5 per week or just $10 from a biweekly check still totals $260 by year’s end.

The key is save something, month after month. It does not matter how small an amount you start with, the key is to set something aside.

If you work, the easiest way to do this is to have the amount automatically deducted from your paycheck and deposited into your savings account. If you receive an alowance, move the amount into savings as soon as you receive the funds.

Second, learn to deposit any additional funds that come your way into this savings account. When you receive a tax refund, an increase in hourly pay or bonus, or a monetary gift it is easy to spend such windfalls on things that you want rather than need. You must resist such temptations and at least set aside a healthy portion of those unexpected funds.

Your first goal should be to build a separate savings account that matches your credit card maximum so that if you should have some unexpected expenses you have the funds to fall back on when necessary. Nothing is more embarrassing then having to call mom or dad to ask them to come to your financial rescue when you have some unplanned expenses.

 

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