by Jim Wang, Contributor,
If you want good financial habits, you must start developing them while you’re in college.
College is a time of exploration, learning, and growth.
It’s also a time when most of your financial life is still in training wheels. If you live in campus housing and are on the meal plan, two of your biggest financial line items are settled – room and board. This means you’re managing a budget that’s far easier than it will be once you graduate.
These are the times you can set in stone those good financial habits that will serve you well after graduation.
Here are six money tips I recommend everyone use but especially college students.
Start Building Credit
After you graduate, one of the most important numbers in your life is your credit score. It’s a three-digit number that tells creditors how creditworthy you are.
In the past, only banks and credit card companies cared.
Today, anyone who extends any kind of credit will care. A landlord will check your credit because they are extending you housing. Employers check your credit as part of a background check. If you have a bad credit score, or no credit history, it becomes much harder for you to get many things in life.
In some cases, like loans, you pay more. In other cases, they may deny you.
Start building credit in school. Get your own credit card or have your parents add you as an authorized user. The earlier the start, the better.
Avoid Credit Card Debt
When I graduated college in the early 2000s, I had around $35,000 in student loan debt. I went to a prestigious private university with some grants and scholarships but still graduated with student loans. Student loan debt topped $1.6 trillion dollars in 2019 – a shocking number.
If you go to an expensive school, it’s difficult to avoid student loan debt. Fortunately, student loans have favorable interest rates and there are government programs that can help you pay it down. Student loans are almost unavailable.
But credit card debt is different. You can avoid that!
Credit card debt can hold you back financially for years, if not longer because the interest rates are so high. They’re often in the mid to high double digits! It’s insane.
If you’re able to establish a budget, spend less than you earn, and stay away from revolving credit card debt, you will be much farther ahead of your peers.
How does this tip fit with the first one? When I say avoid credit card debt, I mean carrying a balance and paying interest. If you are paying off your credit card bill every month, you are building credit without paying huge interest and financing charges. Building credit does not require you to carry a balance.
Create a Budget
Budgeting is a life skill that is easiest when you have a limited financial world. Budgeting is when you create a spending and saving plan. With a spending plan, you try to forecast how much you are spending each month in a variety of categories. As the month progresses, you track how you’re doing against your budget. Any money left over goes into savings.
There are many ways to create and track a budget. There are also plenty of free tools to help you do this and one of the most popular is Mint.
The goal is to get into the habit of building and tracking your budget. Since your financial life is simple, for now, this budget will be easy to set up. Once you get the hang of it, you can do it after graduation when you hit the real world.
Build a Small Emergency Fund
An emergency fund is a pot of money you keep to the side for a rainy day. When you have a little extra money, put it towards an emergency fund. This fund protects you if you ever have to deal with an immediate or urgent financial emergency.
While you’re in college, these emergencies will be minor. As you get older, get more responsibilities, the number of potential emergencies increases.
For example, if you own a car, you will rely on it to get you to and from work. What if you go to drive it one morning and discover it won’t start? Or your tire hits a nail on your drive home the night before? While minor, these are emergencies that you won’t have accounted for in your budget.
This is when the emergency fund can step in. With a fund, you can avoid putting those charges on a credit card. You can now make decisions from a position of financial safety rather than one of panic.
Learn How to Invest
Saving money will start your nest egg but investing will enable it to grow.
Building wealth requires learning how to invest and you can do so with very little these days.
While in college, if you have income, take advantage of Roth IRAs. They are tax-free retirement accounts that take post-tax money. Learn the ins and outs of investing using a Roth IRA but leave everything else for after graduation.
You are a student first but your education must include a little bit of how investing works. You’ll be tempted by all the robo-advisors and alternative investments but avoid that temptation because it’s adding complexity before you’re ready.
Just learn about the markets, how fees impact your investments, and stick primarily with funds inside a Roth IRA.
Last but not least, remember that college is a time for you to try new things when you have very little at stake.
Remember to have fun and graduate without any regrets. If you follow these simple financial tips, you won’t have to worry about your money in the meantime.