According to a survey of college students conducted by the American Institute of Certified Public Accountants (AICPA), about 50% of the respondents (college students) had less than $100 in their bank accounts at some point between August 2014 and August 2015 (Vien). 38% said they had borrowed money from either friends or family (Vien). There are even more disturbing numbers, but to save time, this can all be summed up in a few words: “College students have poor financial management skills.” However, there’s a way to improve these numbers and the purpose of this article will aim to provide some tips on proper financial management for college students.
The previous two articles on the topics of budgeting and scholarships are an excellent way to improve financial management, but proper financial management goes beyond these two topics. And as you may or may not recall in the article “Tips to succeed in college,” proper financial management was one of the tips to success. With that being said, here is an in depth overview of how to properly manage your finances.
To start off, a budget should be the first thing in mind when thinking about financial management. This will provide you with an excellent blueprint of how your year is expected to go. Once you have a solid budget in place, you can determine if you either need to apply for more scholarships or funding, lower your expenses in certain areas, or if you have more room to save money. Establish a budget that you can follow and you will start off on the right path.
After establishing a budget, the next step is to actually follow that budget, which can be extremely difficult to do. However, if you set attainable goals each month, you will know when to cut back on certain things and when you have a little more spending money (i.e. disposable income).
The next step to financial management is to apply for as many scholarships as possible to increase your disposable income. If you’re on a full-ride scholarship, this is not a necessary step. But for those that know they can use a little more money, make it a goal to rack up on scholarship money. Great tip is to apply for FAFSA as early as possible to maximize your scholarship and grant money.
And now to something that I haven’t talked about in previous articles. The more scholarships and grants you have, the less loans you have to take out. If you do have to take out loans, please know the different types of loans. First of all, subsidized vs. unsubsidized. Subsidized means you don’t have to pay interest until after you graduate. Unsubsidized means you have to start paying interest/the interest begins to accumulate as soon as you take out that loan (or when your subsidized period runs out). And don’t even think about missing any loan payments. You also get to deduct the loan interest on your tax return in the year you paid it if you aren’t claimed as a dependent (whoever’s claiming you gets the deduction if otherwise).
The important thing is to know which loans you’re taking out and know how each one can potentially affect you in the future. Try to take out a subsidized loan over an unsubsidized loan due to the interest effect. But remember, a loan should be taken out only when necessary. The order of which you should finance college should be: grants, then scholarships, then work study, then savings, then subsidized loans, and finally, unsubsidized loans. For graduate students, it should be: grants, then scholarships, then fellowships, then assistantships, then savings, then subsidized loans, and lastly, unsubsidized loans. Another thing to consider is the fact that interest rates have gone up and are expected to continue going up so choose wisely when deciding how to finance your education.
The Refund Check
One of my favorite topics when it comes to college funding. Please look in very close detail of what’s in the refund check that you’re receiving. If the money is all in the form of scholarships, then congrats to you. Keep it all. However, if there’s even a dollar of a loan amount that’s part of the refund check you’re receiving, you have to make some decisions. For one, is that loan amount going to cover a necessary expense such as rent? If yes, then perfectly fine to take that refund check, cover whatever immediate expenses you need to cover, then put the rest in a savings account to cover other necessary expenses. Now is the loan portion of that refund check not expected to cover any bills or there will be a fairly large portion leftover that now is considered “spending money?” You might want to give the money back in order to reduce your loan amount. The reason why is because you have to pay that money back at some point. So the best way to go about it if you don’t want any additional debt is to give back the loan portion of the refund check the money you know won’t go towards any bills.
A huge reason why college students lack financial management skills is the lack of savings. It’s perfectly fine to get a refund check and put it towards rent and bills. What you want to consider, however, is how much money you want to keep after taking care of all your expenses. This is known as disposable income which studies show that college students tend to have a lot of. But then again, many college students complain about being broke? The reason for this is mainly due to the fact that students tend to spend too much disposable income instead of saving that money or putting it towards a profitable investment. Just because you have $1,000 to spend today, doesn’t mean you should spend it today because you may need some of that money tomorrow. By simply saving some money each month, you’ll not only have more money to spend in the future, but you’ll be more prepared for any emergency situations such as being sent to the ER after a night of heavy drinking.
Your budget should help you determine how much you can save each month. And if you feel that you’re exceeding your saving goals, then it might be time to look into some investments such as stocks, which can provide you with large potential returns.
If you can lower your monthly expenses in any way possible, then aim to lower them. These are typically your variable expenses such as food, entertainment, utilities, etc. Lowering your monthly expenses will increase your disposable income and will allow you save more money.
When it comes to expenses, I never recommend paying money upfront unless it comes with a benefit or it has interest on it. For example, if you get a refund check at the beginning of the semester and you can pay off your rent with that money, but your leasing agent provides you with no discount, hold on to that money and pay off the rent monthly instead. You can use this money to take care of other necessary expenses, possibly invest it to gain a return, as well as the fact that you’ll be better prepared for any emergencies that come up. Just please be sure to actually manage that money wisely and not spend it on something you don’t need since you know you have to use it to pay rent each month. If you decide to invest it, be sure that you have enough money to pay at the time each payment date comes up. If however, your leasing agent gives you a discount, preferably of a large rate, go ahead and knock out that rent immediately to take advantage.
Since I talked about this topic in depth before, I’ll briefly provide an overview. Credit cards are an excellent way to build your credit score, but you must manage it wisely. Understand that a credit card provides you with an option to spend, not a requirement to spend. Don’t go out and buy everything just because you have the card, but when you do need to buy something, pay with the card, and pay it off that same week.
Another topic talked about in depth before, but college students can certainly get into some investments. My recommendation for college students is stocks. Stocks can prove to provide large returns and don’t require that much money or experience to get started. Always keep up with the market, however, if you want to make the most out of your investments. There are other investments out there, but unfortunately, college is a bit too early to get started, such as real estate. If you have the money to do it, then more power to you, but don’t get discouraged if only stocks are a part of your investment portfolio. Two other great investments are Roth IRAs and mutual funds which you can read more about in the article titled “Money Making Money: Investment Strategies.”
Some of the topics discussed in this article are key reasons why college students have poor financial management skills. If you follow some of the tips in this article, I can assure you that your financial management skills will improve. Ultimately it’s your money to spend and you can do whatever you want with your money. Just recognize that you might need some of that money in the future. And remember to pay your bills before going out to buy those new Jordans.
If you have any questions, please don’t hesitate to reach out to me.
Vien, Courtney L. "College Students Think They Manage Money Well, but They Don't, Survey Finds." Journal of Accountancy. American Institute of Certified Public Accountants, 10 Sept. 2015. Web. 6 Jan. 2016. <http://www.journalofaccountancy.com/news/2015/sep/financial-literacy-skills-201512981.html>.
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