Managing your money as a college student can give you a head start on personal finance and an edge over your peers when you enter the "real world". If you're successful in your college career, you'll be prepared to stand on your own two feet. You'll be armed with the degree you worked so hard for, backed by the most current knowledge within your field of study. You've most likely had a chance at semi-independence, but most likely with a financial safety net.
Whether you'll be equally successful in the real world beyond the academic gates remains to be seen. College is far more than a social situation that consequently offers opportunity for an interesting career requiring a degree. In many ways, those years of higher education and socialization are actually a graduated audition for independent life as a competent, self-sufficient professional who can manage personal and financial responsibilities alone.
Academic GPA and courses completed make up one mere facet of the bona fides needed to declare adulthood. Granted, the sheepskin is vital, but so is your ability to handle money in every situation, regardless of what others may do. What you learn, understand and practice when the almighty dollar is, and isn't, involved will establish fiscal credentials that will endure long after tassels have crossed from right to left.
In this financial guide for college students:
What Should I Know About Money And Cash Flow?
What Is Credit And How Does It Affect Me?
Money, Education And Your Career - What's It All Really Worth?
Basic Investments You Should Make Starting Now
What Should I Know About Money And Cash Flow?
Even for seasoned businesses, staying in the black at all times can be challenging, but that's what managing cash flow is all about. Having enough incoming income to cover outgoing expenses is not enough. The timing between incoming and outgoing must be economically sustainable. If it isn't, you'll have to budget, prioritize, arrange or rearrange your finances so that it is.
Each bill or financial responsibility comes with a due date. You might receive a reminder in the mail, and you might not. While professors may have cut you slack for a paper that's a day late, your creditors won't. Instead, they'll assess you financial penalties far worse than dropping your grade a level for each day payment is delinquent. Mastering cash flow entails knowing exactly which and when payments are due. It means identifying financial needs versus wants, and setting aside money to pay your commitments on time. The first step is to be careful about your commitments.
Unfortunately, even experienced adults don't always comprehend that their signature is a legally binding instrument. Whether inked or e-contracted, your initials and signature commit you to the terms, limitations, penalties and requirements specified within the document you signed. That means that if you enroll in a gym membership for 2 years but realize after 2 months that you simply can't afford the monthly payments, the gym can pursue fulfillment of your contract. If you sign a waiver, you surrender your claim to whatever was specified within. If you sign for a lease or have the utilities in your name, and a roommate backs out or refuses to pay, you'll be responsible for the entire amount. Your signature matters, so respect it for the weight it carries.
Start-Up Expenses Versus Living Expenses
Start-Up Expenses. Every time you move or relocate, you'll have to bear the burden of start-up expenses. Living footloose and fancy-free can be costly. Figuring out how to transport your sofa and other detritus may be the least of the up-front costs that will recur each time you relocate:
- Each time you sign an apartment lease, you'll have to pay the first month's rent plus an additional month's rent or more as a security deposit. Having a pet usually increases your required security deposit and monthly rent, too.
- If you move from one apartment to another, you'll have to again pay in advance 1 month's rent and another security deposit. Depending on where you live, your prior landlord will have anywhere from 14 days (Arizona) to 60 days (Florida) to return your last security deposit minus any damages assessed, depending on state statutes.
- If you decide to terminate your lease early or fail to give sufficient written notice, you may automatically lose your security deposit.
- You may have to rent a moving truck or reimburse friends for gas and effort. If you move cross-country, you may need to hire commercial movers.
- Utilities like water, electric, gas and landline phone or cable all usually have to be activated. Hookup fees from assorted companies can add up quickly.
- You may also have termination fees to de-activate cable, Internet or other utilities.
- You will have to ensure all creditors have your new contact information. You'll still be responsible for bills, even if they no longer reach your residence or email account.
While renting an apartment with friends at college, you may have the luxury of worrying only about your rent, which conveniently happens to include utilities, trash, Internet and cable. Your parents may well have paid for all of your healthcare, living needs and incidental expenses as well as your car and insurance. Too, you haven't had to start paying on your student loans; those will start 6 months after graduation. Living independently will include budgeting for:
- Rent or mortgage.
- Utilities, which may include water, sewer, electric, gas and trash fees.
- Internet and phone service.
- Car loan.
- Car insurance.
- Car repairs and maintenance.
- Gasoline or other fuel.
- Health insurance if you're 26 or older.
- Non-covered healthcare services, copays, deductibles and prescriptions.
- Vision and dental insurance and non-covered expenses.
- Student loans.
- Credit cards.
- Retirement savings like 401(k)s or IRAs.
- Emergency fund savings.
- Additional savings.
- Hygiene and grooming.
- Professional clothing and shoes.
- Leisure, entertainment or travel expenses.
Cash Flow Timeline
Managing cash flow is a yearly, monthly, weekly and daily task to ensure spending doesn't rupture financial limits. Learning to look at income and expenses much like a bank does, through two columns that essentially function as timelines, simulates what the bank will eventually document. If you have to, think of it as a zipper, hopefully one that has nice long teeth on the credit side. On the debit side will be all those expenses we listed above, and somehow, they all have to fit on the zipper.
Keep in mind that electronic banking makes each transaction a real-time withdrawal. In the 60 seconds needed for you to walk out of a store and get into your car, your purchase will have already posted to your account. A paper check doesn't slow collection of funds, either. Your creditor scans the numbers and processes them electronically, all in real time.
What To Do When The Flow Stops
Especially when you know you'l be facing a large, unavoidable expenditure in the future, mapping anticipated cash flow will clarify your financial situation and capabilities. You may have to consider some dos and don'ts:
Do: If you just need a financial spot fix, you could actually pay for an expense with money from your emergency fund. The expense is paid, and life goes on. Then, when your income deposits into your account, you can immediately repay your emergency fund. You just acted as your own bank, interest free.
Do: You may have to prioritize expenses and put a small one on a credit card. Be sure to add that to your timeline's anticipated expenses, and when the bill comes, pay off the balance. Otherwise, it will collect interest, and your expense will grow.
Don't: Do not use your credit card to withdraw or transfer cash. Credit card companies charge extra for cash advances and balance transfers; those checks they send in the mail usually carry transfer fees. If you use your credit card to withdraw cash at your bank's ATM, the card issuer will charge a service fee, and the bank may add foreign card fees.
Don't: Don't cross your fingers and write a check that might overdraft your account, even if you have overdraft protection. If you have overdraft protection, the bank will honor the check. However, the bank will also assess you a fee for each overdraft that draws on your account (up to seven times per day), with a $35 average charge per overdraft. Once the account is overdrawn, fees will collect until you deposit sufficient funds.
What Is Credit And How Does It Affect Me?
You've probably heard people talking about credit, or seen the terms "your credit history" or "credit score" used in articles. but what exactly is credit? Credit is money, goods or services given to you in good faith with the expectation that you will pay it back by an agreed upon date. Your credit is your ability to repay money or services provided on credit. A number of credit bureaus track the way that you make your credit repayments, and this is known as your credit history. A credit score is a summary of these records, and indicates your overall creditworthiness.
FICO® Scores And Credit Reports
Within your family, you're a daughter or son. Within the college community, you're a student. Within the financial industry, you're a FICO score, a three-digit number between 300 and 850. The higher your score, the better your credit rating is. Your FICO score tells creditors and potential employers everything they need to know about you. That is whether or not you are a financial risk.
Yes, your FICO score can play a role in whether a potential employer selects you, and that's not all. From getting a phone contract to making sure your car is insured, your credit score can influence every facet of your lifestyle.
The FICO score is a compilation of your payment history, the types of credit you've used, your current level of debt, your length of history and any new credit you've secured. 65 percent of the score relies on two factors:
1. The amounts owed (30 percent).
2. Payment history (35 percent).
2 things in particular can literally kill your credit score:
- Not paying bills on time. If you miss due dates on bills, you can accrue penalty fees. Most companies add or raise interest rates. Creditors may turn unpaid bills over to collection agencies or pursue financial judgments through the legal court system.
- Using too much of your credit. The best scores go to individuals who use less than a third of their available credit and always pay off balances each month. Set a mental marker, and resist approaching that threshold unless you're sure you can pay off the balance immediately.
The information for your FICO score comes from three credit reporting agencies: Experian, TransUnion and Equifax. Each tracks your financial transaction history and assigns you a credit score.
Where Can I Check My Credit Score?
By law "The Fair Credit Reporting Act (FCRA) requires each of the nationwide credit reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months."
The Federal Trade Commission (FTC) recommends that you request a copy of your credit report each year and examine it for errors. As the FTC's site states, "The three nationwide credit reporting companies have set up a central website, a toll-free telephone number, and a mailing address through which you can order your free annual report."
You can request all three agencies' reports at once or request them individually once a year for free through AnnualCreditReport.com:
- Request online through annualcreditreport.com
- Call 1-877-322-8228
- Complete the Annual Credit Report Request Form and mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281
Any student loans you're responsible for will have a weighty impact on your credit reports and your resulting FICO score. Student loans are also the one debt that will never go away, even if you declare bankruptcy.
If you're late in making a payment on your student loan, your account will go into default. Once an account goes into default, it remains in default until you settle the debt. If you default on your loan:
- The Internal Revenue Service (IRS) can automatically collect owed balances from your tax refund.
- The government can garnish your wages by up to 15 percent of your disposable income until you've settled the loan.
- The government can take up to 15 percent of your federal benefits as payment, such as Social Security retirement or disability benefits.
- The government can sue you indefinitely for the balance.
Defaulting on a student loan can damage your credit for many years. If you aren't earning sufficient wages to cover payments, immediately contact your lender. You may be able to defer payment or consolidate loans into a single, reduced payment that is more manageable. Defaulting, however, is not an option.
Credit Cards By The Numbers
You need a credit card simply because life events sometimes just intervene, despite every precaution. When resources are limited and need non-negotiable, you may have no choice but to break out the plastic. You, however, need to be sure that you understand what you're signing for.
Every card comes with not one but several important percentage numbers:
- Annual Percentage Rate (APR). This represents the interest that the credit card issuer will apply to any balances not paid off monthly. Basically, the higher your FICO score, the lower the interest rate you'll be able to merit. The lower your FICO score, the higher the interest rate will be. This rate is variable; as the prime rate increases, so will your APR.
- Minimum Payment Amount. You need to understand how your credit card issuer calculates the minimum payment on your bill. It's usually 2-4 percent of your card's balance – principal plus interest accrued at your card's specified APR.
- Fees. Many cards have no annual fee. However, some do, particularly ones that offer significant services and benefits. The greater the rewards and benefits, the more likely the card will have an annual fee, and some are quite salty (up to several hundred dollars a year).
- Transfer Fees. Withdrawing or transferring available credit as "cash" often comes with additional minimum charges or fees based on a percent of the amount transferred. This is a front-end fee additional to any APR interest applied to balances over the course of repayment.
- Introductory, Variable or Piecemeal Interest Rates. Introductory interest rates last only for the introductory period specified. After that, they rise, and sometimes they jump. Be careful, too, of seemingly small but multiple fees. They can total more on a balance than regular interest.
For an example of why credit cards can be a deceptively easy solution, let's say the transmission in your car fails and is no longer covered by warranty. The repair is going to cost you $1,500, so you decide to put it on your credit card, wincing at the 18.9-percent APR. If you put the card away and don't use it again:
- Your minimum monthly payment, based on 4 percent of the balance, will be $60.
- Each month that you retain a balance, the card issuer will be applying that 18.9-percent APR. You'll pay $60 that first month, but the credit card company will take about $23 in interest, leaving about $37 to apply to your balance.
- Meanwhile, they'll keep applying their interest to your balance while slowly reducing your minimum payment.
- If you never pay more than the minimum payment, it will take you 88 months (over 7 years) and cost you $2,336.14 to pay off that $1,500 transmission repair.
If you must put large amounts on your credit card, pay them off or schedule for amounts well in excess of minimum payments. If you have access to a credit union, you may be able to find a personal loan with a lower rate that you could pay off sooner. Just be aware of limitations and requirements.
Money, Education And Your Career - What's It All Really Worth?
You've probably been told that a good education will give you a better salary, and a better salary will get you a better lifestyle. But there's a lot more to this equation than just that. Things like your location, expectations, opportunities and taxes will all impact how much you actually get for your money.
Cost Of Living
Understanding the concept of cost of living can save you many mistakes in determining whether to take the job that's being offered in California or the one in North Carolina. Cost of living is "the average cost of food, clothing and other necessary or usual goods and services paid by a person, family or group considered as a standard by its members."
Simply put, milk, eggs, rent and even utilities will cost far more in certain cities than in others. Life in or near a large city is often more expensive than small-town living. Other factors come into play, too. If a city has a significant crime rate, apartment rents in safe, desirable living areas may be considerably higher than the city's average rent figure. If an area is experiencing an influx of talent but hasn't developed the housing to support it, finding a decent place to live may be more than difficult. Affordable housing may require trade-offs in long commutes, not only costing you time but also in turn generating a gasoline bill and increasing wear and tear on your car. Even public transportation can add up.
Some companies and government agencies apply extra percentages to wages for employees in certain locations to compensate for higher-than-average costs of living. Washington, D.C., is a prime area. However, for starter salaries, you still may be able to afford only a small studio apartment or have to find a roommate or two to make costs affordable.
Let's say you were offered two entry-level high-finance jobs, one in Charlotte, North Carolina, for example, and the other in San Francisco, California. Your potential California-based employer even offered to sweeten the deal, promising $50,000 more a year than whatever the Charlotte job paid. Is the extra 50K worth it? Charlotte's Chamber of Commerce just happens to have a relocation calculator. We compared making $100,000 in Charlotte with making $150,000 in San Francisco:
- After taxes, dollar for dollar, your income will go nearly twice as far (1.78 times farther) in Charlotte than it will in San Francisco.
- Housing is 3.7 times cheaper in Charlotte. The average two-bedroom apartment will cost you around $850 a month in Charlotte; in San Francisco, two-bedrooms average more than $3,000 a month.
- Groceries will cost 22 percent more in San Francisco.- Transportation – private or public – will cost nearly 25 percent more in San Francisco.
- In 2014, the average family household wage in the Charlotte metropolitan area was $65,613; in San Francisco, it was $100,827.
- While the initial difference in base pay figures may appear attractive, the difference in cost of living will more than make up for it.
- To put it quickly into perspective, you only need $84,000 in Charlotte to equate to that $150,000 in San Francisco.
- If you had an offer for $100,000 in Charlotte, you're already well ahead of the game. If you went to San Francisco without additional compensations, you'd actually be losing money.
The Tax Man And Other Responsibilities
Once you understand how far a dollar will or won't go, you also need to understand that gross pay is quite different from net pay. Gross pay is the figure employers will dangle before you in hopes that you'll say yes. Net pay is what you'll actually take home, and the numbers will be quite different. Each paycheck will have deducted from it at a minimum:
- FICA and OASDI, or Social Security Tax. The deduction will total 6.2 percent of your earnings. The Social Security Administration will track your yearly earnings and use them to determine the dollar amount of your retirement benefit.
- Medicare Tax. You and your employer each contribute 1.45 percent of your earnings to fund healthcare for people age 65 and older.
- Federal, State and Local Taxes. Allowance figures determine how much tax is withheld from your paycheck. It usually correlates to how many dependents you have. As the number of allowances increases, your tax withholding decreases. If you enter too high a number, you may owe income taxes at year's end and possibly even an underpayment penalty.
- 401(k) or 403(b) Withholding. This is your investment in your retirement.
- Health Insurance. Most employers provide a portion of your healthcare benefits. They pay a part, and you pay a part. Your share of costs is deducted from your paycheck.
To nail it down for you (and we're using very conservative figures) if you were to earn $2,000 biweekly, file as single and claim two allowances, your $2,000 gross pay becomes $1,437.28 in net pay because:
- $124 went to Social Security.
- $29 went to Medicare.
- $214.18 went to federal taxes.
- $95.54 went to state and local taxes. We used an average, as this varies.
- $100 (your contribution of 5 percent) went to your 401(k).
The difference between gross pay and net pay was $769.62.
- Basic Investments You Should Make Starting Now
By now, you're probably ready to hide under your bed. Yes, the world can be a tough place. That's why saving is so important. The most important deduction from your paycheck is the deduction you pay to yourself. Social Security is part of it, but what you save and contribute will be a key factor for whether you'll be able to retire and how well you'll be able to live once you're no longer part of the active work force.
A 401(k) is a savings plan that is employer-sponsored. You determine a percentage of your gross, pretax pay that you want to contribute. Most employers will add matching funds which can be anywhere from 3 to 6 percent so if you don't participate in your plan, you're actually cheating yourself twice. While you may only be able to contribute a small percentage at first, make the sacrifice because 401(k)s have annual limits on how much you're allowed to contribute. For 2015 and 2016, the annual limit for individuals under age 50 is $18,000.
The money goes into the account tax-free and is invested to accumulate interest. You'll have to determine how you want to distribute your money among high-risk, medium-risk and low-risk investments. Usually it's allocated by percentages, and you'll get statements showing how your investments are performing. You pay no taxes until you withdraw funds for retirement.
A 403(b) is available only for individuals employed by certain tax-exempt organizations, such as public educational organizations, some nonprofits, cooperative hospital service organizations and self-employed ministers. It's also known as a tax-sheltered annuity and is similar to a 401(k) in employer contributions.
Individual Retirement Accounts (IRAs) – Traditional Versus Roth
An IRA is another way of saving money for retirement or educational needs. You can contribute up to $12,500 yearly in an account that will earn interest through assorted stocks, bonds, mutual funds and other assets. You'll be able to withdraw funds only for retirement once you reach age 59½ or if you use it for additional education. Otherwise, you face 10-percent penalties and tax issues. The basic difference between a traditional IRA and a Roth IRA is whether the dollars you invest are pretax dollars or post-tax ones:
- Traditional IRA. You invest pretax money and pay tax on it only when you withdraw funds. Your money grows and accumulates tax-free, but you pay taxes on the final balances, after your money has grown.
- Roth IRA. You invest money that has already been taxed. When you withdraw, it, you pay no taxes. With a Roth, your money grows tax-free, and you withdraw it tax-free. The Roth IRA does have income limitations: in 2015, the income limit for individuals filing taxes as single was $105,000.
In case you haven't noticed, the IRS governs much of what you can and can't do with your money, so start saving early and manage finances wisely. Even a small investment in your 401(k) begun now can yield amazing results. If you only made $40,000 a year until you were 70 and contributed just a mere 3 percent and if your employer contributed a matching 3 percent, at a modest 5 percent return, you would have over $250,000. If you didn't start contributing until age 35, you'd have less than half that at retirement (not even $115,000).
Make savings a habit. You're only starting out, but it's never a bad idea to start as you intend to finish.
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