Personal Finance Advice for College Students
Personal Finance To-Do List
- Create a budget
- Invest in retirement
- Get property and life insurance
- Create an emergency fund
- Open a credit card account
Create a Budget
Left unchecked, college students can find themselves without enough money to function. The primary purpose for this phenomenon is that these students do not properly manage how they spend their money. It may seem simple enough, but many college students do not take the time to sit down and create a budget, which is too easy to do in excel. For college students, creating a budget will allow them to see exactly how much money they can afford to spend each week on “fun stuff.” By having this finite number, students can plan how they will best enjoy their money week to week, while still having enough money for the basics. Take a look at the sample budget bellow, and follow these simple steps to create your own (Remember, the sample budget is designed for a college student):
1. Look up your tax rate from the IRS website. (Don’t worry, most college students don’t end up paying any federal taxes.)
2. Enter your gross monthly income. (from your part-time job or allowance from mom)
3. Calculate your taxes by multiplying your gross income by your tax rate.
4. Calculate your net monthly income by subtracting taxes from gross income.
5. List all your monthly savings (retirement saving, emergency fund savings, savings for a trip to Las Vegas, etc.)
6. Sum your total monthly savings.
7. List all your monthly expenses for which you are responsible. (car insurance, cell phone bills, rent, etc.)
8. Sum your total monthly expenses.
9. Subtract your total monthly savings and your total monthly expenses from your net monthly income.
10. Divide your monthly spending money by 4 to get your weekly allowance.
11. Make a weekly spending plan
12. STICK TO YOUR SPENDING PLAN!!!
With your budget, you can create your weekly spending plan. For example, if your weekly budget is $96.75, you can make the following plan:
By creating a monthly budget and sticking to a weekly spending plan, college students can make sure to fulfill all of their financial obligations and still have fun each week.
Invest for Retirement
The sooner you start investing for retirement, the better! Notice I say INVEST for retirement, not save. Even with the current shape of the economy, don’t be afraid to invest in the stock market. The stock market will rebound, and as a young college student, you have plenty of time to wait for this to happen. There are many different ways to invest for retirement. For college students, I suggest a simple and very effective way. Just follow these steps:
1. Open a Roth IRA account.
A Roth IRA is a retirement account that comes with great tax benefits. Although contributions are not tax deductible, all the money earned in the account is tax free. This benefit is great if you plan on making more money later in life than you do now (hopefully you all plan on this). The catch is that you can’t withdraw any money you make until you are 59.5 years old; however, you can withdraw any money you contributed to the account at any time. Also, there is a limit of $5,000 per year you can contribute to the account. You can open up a Roth IRA with many different institutions such as Bank of America, USAA, Scottrade, etc.
2. Select a Target Date Mutual Fund
Target Date Mutual Funds are great because they automatically lower your risk as you get older and closer to retirement. If you plan on retiring in 2050, then select a 2050 Target Date Mutual Fund. When choosing a fund, search for funds with “no load,” “no transaction fees,” and “a low expense ratio.” There is no proof that actively managed funds outperform passively managed funds, so why pay extra for them? A financial advisor at the institution you open your Roth IRA with can help you choose the perfect fund that meets my search criteria.
3. Set up an automatic investment plan
After you open a ROTH IRA and select a Target Date Mutual Fund, make sure to contribute to your account every month. If you want to max out your contributions, then the magic number is $416.66 per month. If this amount is too much for you at the time, pick an affordable amount, even if it is only $100 per month. As you get older and earn more income, this number can easily reach $416.66. Once again, a financial advisor at your institution can help you set up this plan.
4. Sit back and relax
Don’t stress over the everyday fluctuations of your account value. Over time, the average return will smooth out, and by the time you retire, you will have a good amount of cash for retirement to use in combination with a 401(k) plan, pension plan, social security, etc. Here’s some quick math: Assuming a conservative average annual return of 8%, if you invest $5,000 per year, starting when you are 22 years old, you will have $1,148,734 when you are 60. You will have only contributed $190,000, and you will have earned $958,734 TAX FREE!
Get Property and Life Insurance
Insuring yourself is extremely important, and it is key to being financially secure. As a college student, you probably rent, and your personal property is not covered in the case of theft, loss, fire, or other natural disasters. Getting up to $10,000 worth of coverage can cost only a few bucks every month and can be bundled with your auto insurance plan. It would be a financial disaster for a college student to have to replace a cell phone, laptop, jewelry, and clothes all at the same time. Check around with different insurance companies for the best price.
When it comes to life insurance, you may be wondering, “Why does a young and healthy college student need life insurance?” By locking yourself into a life insurance plan now, you will guarantee that you will have life insurance when you get older and have a family. By being young and healthy, your premium will be very cheap and affordable. If you don’t lock into a life insurance plan now, you may become uninsurable if something bad happens to you or is discovered about your health. When you grow up and have a family, if you cannot get life insurance, you will be putting your family into great financial insecurity. Bottom line, get insurance now while you are young and healthy.
Create an Emergency Fund
Even though you are now properly insured, it is still very helpful to have an emergency fund to help pay for unexpected expenses. For example, let’s say you hit a curb and blow out your tire, which costs $300 to repair. This unexpected expense will throw off your budget if you do not have an emergency fund. In the sample budget at the top of the page, this little accident would take away 3 weeks’ worth of spending money for “fun stuff.” To create an emergency fund, simply budget a small amount of money each week to add to a savings account that you use ONLY for EMERGENCIES.
Open a Credit Card Account
When I was in college, I was very shocked to see how many students did not understand exactly how credit cards work. Therefore, many students were afraid to get a credit card. When used correctly, a credit card is a great financial tool. Before I go any further, make sure to follow these simple rules:
- Get a credit card with no annual fee
- Don't spend money you don't have
- Pay off your entire monthly balance, every month, on time
If you follow these simple rules, you will receive the following benefits:
- You can use your bank's money for FREE for about 2 months at a time
- You earn rewards such as cash back, airline miles, and hotel points
- You build up your credit score, which will allow you to get cheaper loans in the future such as mortgages and auto loans
Bottom line, get a credit card and use it responsibly.
This is basic advice for college students to set them up for financial success in the future. If you need more information about any parts of the Personal Finance To-Do List, I encourage you to do more research or email me your questions. Finally, all of the tips I came up with, I follow myself, and so far, I am off to a great financial start.