As a current student, I can tell you with certainty that college is a weird time. Eighteen-year-olds are thrown into a tiny room in a miniature city with electric scooters instead of cars and party mansions instead of houses. Combine the already jarring lifestyle change with the ever-looming fear of approaching exams, daily distractions of campus life, and the constant need to feel present on social media, and it is easy to understand why college students are infamous for fast food and low bank account balances.
What is even more worrisome is that college students reported that the subject they feel least prepared about in college life is managing their own money. This not what you want to hear from people who are supposed to be financially independent in the near future.
The good news is that getting ahold of your personal finances, whether in college or not, does not take a lot of time once you have set a sound plan in place. Here are four guidelines on how to build a strong financial foundation, despite being in the middle of the strangest time of your life.
"You Can’t Spend What You Don’t Have”
This is one of the most-quoted phrases of personal finance—and for good reason. The logic is if you put your money in a spot where you cannot access it, you will not physically be able to spend it.
The best way to do this as a college student is by putting away some of the money you earn from part time jobs, internships, and summer gigs into a savings/investment account separate from your checking account. This will reduce the amount of impulse purchases you make once the semester starts again. A good starting place is to save 20 percent of what you earn. Creating an online bank account separate from your checking account is free, can be done in minutes, and often allows for significantly higher interest rates compared to average savings accounts (which means more money for you).
Create A Cash Buffer
A great way to avoid waking up to a bank account with an $8.00 balance is to create a “cash buffer” in your checking account. Think of a number you never want your checking account to dip below. Now treat that number like zero.
For example, I do not like my checking account to go below $150.00. Anytime it gets near $150.00, I try to cut back on unnecessary purchases or try to make some extra money here and there. Many banks allow you to set mobile alerts once your balance hits a certain level; which can be a helpful reminder when your balance hits that tipping point. A cash buffer is a great way to avoid overdraft fees and credit card debt. Slowly building up the buffer is also a useful practice to prepare for any sudden and emergency purchases.
Educate Yourself Now, Thank Yourself Later
Educate yourself on investing. This SEC-provided resource is quite lengthy, but worth your time to spend a few days getting through it.
Even if investing is not a topic you find very interesting, it is vital to your financial health to understand the basics. Without a foundational understanding, you may find yourself throwing money away on expensive financial products (salespeople target uneducated college students) or drastically underprepared for long-term goals. Educating yourself now will put you at a huge advantage when you know how to invest your hard-earned money later. Try taking an introductory personal finance class if you have an open elective or try using credible websites like Investopedia, Khan Academy, and those belonging to a fiduciary.
If you are interested in diving deeper into investing and the world of personal finance, check out the book Making Money Simple. It is geared to individuals in their 20s-40s and provides the perfect starting point for all money-related decisions.
Have questions like the following ever run through your brain?
- “When I graduate, should I pay off my student loans first or invest the extra money I have?”
- “Should I invest my savings into Tesla Stock?”
- “Do I need to start saving for retirement out of college?”
- “Should I put the money I earned over summer into Bitcoin?”
- “What is an IRA, should I be contributing money to it, and what is the difference between a Roth and Traditional IRA?”
If your answer is yes, that is a good sign you are thinking about your future through the lens of money. Ultimately, personal finance is the process of managing your money in a way that allows you to achieve your goals. Questions like these will often come up, so make sure you are getting your answers from the right people.
Life as a college student is a once-in-a-lifetime experience. Getting a solid education and having a good time are top priorities, but it is also important for you to build up your personal finance skills as you become more financially independent. That said, you likely do not need to be a ferocious saver, nor do you need to write a strict budget every week to build a strong financial foundation in college. Simply take advantage of your opportunity to learn more about personal finance, and practice being smart with your own money. The decisions you make now can have a huge impact on your wealth in the future.