College Students and Money
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Most young adults enter college and have no idea of how to handle their money. While they are prepared for almost every other area of college life, the one thing that they have not been prepared for are their finances. College is one of the first times that students get to test their independence, and their finances are a major part of this independence. Understanding their finances can set them up for future financial success and can help them avoid a future financial mess.
Here is Part 1 of what College students should know about money and person finances:
Don’t use social media as your standard of living. Too often people use what they see on social media as a way to live their life. Social media is not reality. Others put out what they want you to see, but you rarely see what that they did to get it, or how they are paying for it. Understand that someone else’s money and financial status is their money and status. Work on getting and keeping your own money instead of trying to keep up with the next person’s money.
Understand the impact that credit cards can have on your finances. Credit Cards are useful if you use them wisely. The pain from the misuse of credit cards can last for years. For example, if you charge $1,000 on a credit card that has an interest rate of 13%, it will take you approximately 5 years to pay off and will cost you approximately $850 in interest. It nearly doubles the original cost of the item. Also, when you have a balance on your credit card, be sure to pay the bill every month and be sure to pay on time. Paying late or missing payments has a negative effect on your credit score. When initially getting a credit card, opt for a card that has a low interest rate and no annual fee. Your goal is to be a responsible credit card holder so later when you need the credit to buy a car or house, you can quality for the best rate.
You are never too young to Save and Invest – Many believe that investing is for older generations. Truth is, with the right job and right investments, if you invest approximately half of your paycheck starting at age 21, you can retire by age 45! Could you image not having to work at such a young age? Take a look at how investing works. Assume you save $100 a month in a savings account or stock market yielding about 6% interest a year; after four years you’d have about $5,600 dollars saved up. Or, let say you invest $2,000 when you are 17 into an account that yields a 6% yearly return. If you never make another deposit in this account, by the time you are 40 you would have earned approximately $7,700, and by the time you are 65 you would have earned approximately $33,000! All from investing $2,000.
Know the difference between compound interest and simple interest. – When you invest your money in any account, know that compound interest generates more money than simple interest. Compound interest is calculated on principal and accumulated interest of previous month. Basically you get interest, on interest. Simple interest only calculates on the principle. Lets say you take that same $2,000 from above, and invest it in an account that does not compound interest. Using the same 6% interest rate, that one deposit of $2,000 would only give you $4,800 by the time you are 40, and $7,800 by the time you are 65. You are still generating money, but compound interest is truly a better investment.
Be prepared for emergencies. Once you start college, and as you get older, understand that you need to rely less on your parents. Establish an emergency fund for yourself. Your emergency fund shouldn’t be a line of credit; it should be cash.
For many young adults, college is the first step to independence, including financial independence. Since money matters are not taught in school, you need to make it a point to understand how to manage your money. College students are in the perfect position to start building wealth. Most of you have minimal responsibilities, so you can make saving and investing a priority. If you as a college student understand just a few basic personal finance concepts, you will be better off during your college years, and be in a great financial position as you head out into the real world. Being mindful and learning good money practices in college can help you in the long run.
Smooches,
Keisha