Personal Finance for College-Bound Students

Congratulations, Magooshers! You got into a good college. I’m sure you feel a big sense of relief. A long, stressful journey is finally at its end. Let’s take a moment to appreciate your accomplishment. Pause for appreciation. Okay, there’s a lot to do between now and your first day of college. There are trips to Bed, Bath, and Beyond to buy dorm supplies. There is waiting to find out who your roommate will be. There is high school graduation, another good reason to celebrate. Finally, there is creating a personal finance plan that will see you through your time in college. Depending on you high school, you may have already taken a personal finance class. If so, feel good about that, too. Yet you can’t learn everything in a class. Sometimes, what you learn isn’t the best advice, or doesn’t reflect what managing money is like in the real world. As life experience will teach you a lot about personal finance, in this article, I’ll throw in a few personal stories so you can learn from my experiences. That being said, let’s talk money! Sign Up for a Checking Account Paper checks (or cheques) may be going the way of the dinosaurs, but checking accounts are still the best first step towards having a successful personal finance plan. You need to choose your first bank. For many of you, this will mean setting up an account with either Bank of America or Wells Fargo. These two banks have many ATMs across the United States. By all means, do your research. There may be other, better options depending on the state where you live. Another thing to keep in mind is that some banks charge a monthly fee for checking accounts, especially if your account falls below a certain level. Unless it absolutely can’t be helped, avoid these banks like the plague. You shouldn’t have to pay a bank for the privilege of sitting on your cash. With a checking account comes a debit card. We’ll get into the difference between debit and credit cards in a bit, but there’s one big rule to remember at this stage. Treat your debit card like cash, and you’re good to go. Get a Job Cue the music Now that you have that checking account, you need to put some money in it. What to do? What to do? Oh yeah, get a summer job (or two)! I know; you’d rather be spending your summer hanging out with friends, many of whom will be moving far away come late August. Even so, the summer before freshmen year is a rare opportunity to build up some savings. And when I say ‘savings,’ I don’t mean savings for retirement. I mean savings for all the costs of college that aren’t tuition, dorm fees, and a meal plan. And for that, Magooshers, you are going to need a good chunk of change. If you take 30-40 hours of each week and commit them to a summer job, your wallet will thank you during your freshman year. Believe it or not, many of your friends will be doing the same thing. They’ll be busy, and you will be, too. You’ll still have time to hang out and have fun. Trust me. Once you start making money, then comes the challenge not to spend your money the second you make it. Debit cards are as easy to use as cash, and for many inexperienced teens, money has the tendency to burn holes in their pockets. To make sure the money stays safe for a few months, here’s an idea from my playbook. Back in college I worked at Blockbuster Video (R.I.P.) to save money for my study abroad program. I did this over two summers and one winter break. To make sure I wasn’t tempted by my savings, I put my money in a C.D. (Certificate of Deposit). C.D.s are special bank accounts that exist for as little as one month all the way up to 5+ years. The rule is that until the account ‘ends,’ you can’t touch your money. If you tried to, you’d have to pay a HUGE fee. So if you want to keep your money safe during summer, I’d suggest a 2-3 month C.D. You’ll even earn a tiny bit of interest, too! So it’s late August, and you’re off to college. To make sure your money lasts, there’s one final piece to the personal finance puzzle Budgeting Growing up, there were many nights when I did my homework at the dining room table. Across the table, my mom or dad would be doing the family’s monthly budget. Every month they printed out a one-page spreadsheet that listed their expenses. There was a space for the mortgage, food, vacations, electric/water/gas bills, fun money, and a couple of other categories that I can’t remember. All of this money was in their checking account, but by splitting it up on paper, they could figure out if they were over or under-spending each month. Doing this, my parents were able to create a nice retirement nest egg, which they are currently enjoying. Thankfully, your budget in college won’t be as complex as my parents’ or other adults living on their own. Also, there is only one big rule to remember when it comes to budgets. Once you’ve exhausted the money in a certain category, that’s it, you’re done. Spend all your fun money on the first Saturday night of the month? That’s nice, but expect to stay in for the next three weeks. Now, you won’t always be perfect with your budget (I’m not), but budgeting will help you save money, something that is really tough in 21st-century America. You’ll still be a ‘poor college student,’ but at least you won’t be in debt. And speaking of debt†¦ Credit Cards AREN’T Evil (Unless You Let Them Be) When I took personal finance in high school, my teacher really hated credit cards. He thought they only existed for credit card companies to ‘enslave’ people with crushing debt. His entire curriculum basically told us not to buy things unless we could pay cash. Though he was teaching with good intentions, and probably had a bad credit card experience as a young man, I think he went a little overboard. Heres some good tips to make sure that no credit card ever turns evil on you. Start with a Debit Card Debit cards, like credit cards, are little plastic rectangles with magnetic strips on the back. Yet instead of charging money for goods, every swipe of a debit card takes the money directly out of your bank account. If you want to buy AWESOME THING, but don’t have the money in your account, AWESOME THING stays on the shelf. Debit cards were also the beginning of my credit card journey as well. For the first two years of college, I only had a debit card. I had to check my balance each month to make sure I had enough money. At the same time, I had a simple budget so that I keep track of my spending. When You Do Get a Credit Card, Have a Low Spending Limit Once you’ve had a debit card for a while, it’s time to get your first credit card. My advice: start small. There are a ton of credit cards out there, and most of them are for people who have had a credit card for a long time. These cards have perks such as airline miles, cash back, and other goodies. For your first card, stay away from the goodies. Many credit card companies, such as VISA and American Express, for example, have simple, no fee credit cards for first timers such as yourself. They aren’t flashy, but they are your foot in the door when it comes to credit. They also have a low spending limit. For example, if you go above $1,000, the card cuts you off. These ‘breaks’ exist to make sure that young people don’t ruin their lives by going into thousands and thousands of dollars in debt. After all, when you graduate and get a job, you can always get a new card with perks and raise your spending limit. So once you get your first credit card, keep track of your purchases, and pay it all off at the end of the month. Most people don’t go into debt because of their purchases, but because of the high interest rate that comes with their card. But, you may ask, if I treat my credit card just like a debit card, why do I have to get a credit card at all? Good question. Youre doing this to raise your†¦ Credit Score You’ve probably seen the commercials: check your credit score online, for FREE! Other commercials portray poor people who find out too late that their credit score is REALLY LOW! But what is a credit score, and how does it affect your life? First of all, credit scores are completely made up, but important numbers. In a nutshell, there are three credit bureaus (Experian, Equifax, TransUnion). These bureaus compile information regarding every person in the U.S. with a credit card. In examining the data, they ask themselves some key questions: How long has this person had a credit card? How many credit cards does this person have? What is the most expensive thing this person has ever charged? Does this person have other debt? (The big one for young people is student loans.) What is this person’s credit limit? (The maximum amount of money your credit cards will let you spend.) Does this person pay off their credit cards every month? Has this person ever missed a credit card payment? If the person carries a balance on their credit card, how much are they paying back each month? Has this person ever declared bankruptcy? After crunching the numbers, each company comes up with a credit score, a number between 350 and 850. Like the SATs, the higher number you have, the better. When you start off with a credit card, expect your credit score to be low. That’s natural. You’re new to credit, after all, and you need to prove yourself before you earn a great score. How long does this take. If you don’t have any slips ups, about seven years. That’s right, seven years. What’s a good credit score? Well, generally anything above 750 is considered ‘excellent.’ If you have above 800, you are golden. What do I mean by that? Let me give you a personal example. Because of the good financial education I received from my parents, I got my first credit card at 20, a VISA. At 24, I got an American Express card. I charged many big and small purchases to my cards. Every month I paid off my balance, and increased my credit limit when I got a job as a teacher. Then came April 2015. I got into a bad car crash, and had to get a new car. Once I picked out my new car (a Honda Fit, which I totally recommend for college-bound students 😉 ), I sat down with the dealership’s finance manager. I wrote him a check for the full balance. Now, the dealership had already checked my credit score, and I was golden. Because of this, the manager didn’t even call my bank to make sure that my account could cover the check I wrote. He put my check in a drawer, handed me the car keys, and shook my hand. Here’s the moral of the story: My good credit score allowed him to trust me. It’s hard for people under the age of forty to receive the trust from people in positions of authority/power, and when you’re applying for a home loan, buying a car, looking for apartments, or even applying for a fancy credit card, a good credit score is your silver bullet for success. I can’t say enough about how easy it has made my life, and will continue to do so if I keep paying my bills on time. One Last Thing About Credit Cards If you’re feeling nervous about getting your first credit card (a normal feeling), let me tell you one last story. When I was a college freshman in 2004, banks were handing out credit cards to college kids like candy on Halloween night. There were big tents sets up around campus the first week of class. Sign Up for a Credit Card and Get a Frisbee! Sign Up for a Credit Card and Get a T-Shirt! Back then, credit card companies were absolute predators when it came to marketing to newly-minted adults. The reason the credit card companies could get away with this was because it was cheap for them to hand out credit. If a teen racked up a ton of debt, the credit card company could get by if he or she just made the minimum monthly payment. Then the Great Recession started in 2008. Lending (which comprises all credit, from credit cards to home loans) froze up faster than a glass of water on Pluto. Due to the recession, and a few new laws, credit card companies could no longer approve as many credit card applications, especially those submitted by young adults. Though many young adults were shielded from making bad mistakes when it came to credit, others could not begin their credit history at a crucial time in their lives. Today the situation when it comes to credit cards is a mixed bag. Though it’s a lot safer to get your first credit card than it was 10 years ago, you still need to do your research before signing on the dotted line. Like I said before, no one’s perfect, and if you do make a mistake or two when it comes to managing your credit, you want to make sure that your mistakes don’t follow you around forever. Final Thoughts on Personal Finance Just like with anything, as you get older, the challenges you’ll face regarding your money will get more complex. Yet as you gain more experience with budgeting and debit/credit cards, these challenges won’t seem overwhelming. And even if you have some student loans to pay back after college, the lack of credit card debt will put you ahead of the majority of your peers. And that, Magooshers, is priceless. Till next time.