Financial Advice for College Students

Many banks offer free accounts for college students. Maintaining just one of each account will make maintaining your finances much simpler, allowing you to easily review your income and expenses.

Download a mobile app like Mint or Simplifi, which will let you link your bank accounts and help you understand where your money is going. You also can print your bank statements monthly and review this. It is critical to understand how much you make and spend each month.

Once you know where your money is going, you can become intentional about how you want to spend. Start by listing items that you need, like housing, transportation and food. With whatever is left over, you can create a list of items you want, then rank them in order of importance.

This is money you leave in your savings account that is only to be used if you have an interruption in income or unexpected expense. Most college students get paid hourly wages. A common illness such as the flu can really set you back financially if you don't have money put away for a "rainy day." Try to build this fund up to the equivalent of 3-6 months of expenses. If you do step 3 (track income and expenses), you can easily determine how big to make your emergency fund.

The Free Application for Federal Student Aid determines if you qualify for student loans, grants and certain scholarships. By applying early, and working closely with your academic advisor, you will be able to build a plan for how to pay for school.

Enroll in rewards programs. Many restaurants, grocery stores and gas stations offer between 5-20% off your purchases simply by downloading an app and creating an account. Get quotes on your auto insurance periodically from a few carriers to make sure you are getting the best deals. Shop your cell phone plan to see if another carrier offers something better. Always ask yourself if you can get a comparable product or service somewhere else cheaper. Discretionary spending is a large percentage of your budget, so be careful.

Most successful adults don't get everything they want all the time. Don't develop the expectation as a college student that you should get everything you want all the time. Opportunity cost is a fact of life. Learn to be content with where you are now and enjoy the process.

This means to avoid credit cards if possible. In college, credit cards create asymmetric risk. This means the financial reward for using them (rewards points) is not large enough to compensate for the financial risk (you get into extremely high interest debt and cannot recover). If you do want one credit card to establish your credit history, only use it to make a small purchases and pay off the balance in full each month.

Many employers offer 401(k) or other savings plans, even when you are in college. If your employer offers a match, take advantage of this free money by enrolling in the plan. This will give you exposure to learning about different types of investments like stocks, bonds and mutual funds. If your employer does not offer a match, you also can invest on your own in a brokerage account, Traditional IRA or Roth IRA. Each of these accounts has pros and cons and learning about them early on will benefit you for your entire life.

Read a few books about personal finance. "The Psychology of Money" by Morgan Housel and "Just Keep Buying" by Nick Maggiulli are fantastic for beginners. Money affects so many aspects of our lives. Rather than letting it become a source of frustration, learn about how it works so you can use your knowledge to your advantage and make this an area of your life you can be successful in.

Most people who do not work in the finance industry don't even know that financial calculators exist. This is a shame, as learning to use one is simple and the value it creates for the user is immense. Most financial decisions can be properly evaluated very well using five buttons on a financial calculator. You can use a financial calculator to calculate your exact payment on a car loan, mortgage or any other loan. You can use them to calculate your rate of return on different investments. You can use them to calculate how much you should be saving every month to reach a certain goal by a certain time. The list goes on and on. Common financial calculator models include Texas Instruments BA-II Plus, and the HP 10BII plus. Both sell for around $50 or less.

There is a huge library of YouTube videos available for free that show you different ways to use these calculators. In addition to YouTube videos, you also can purchase a book that will show you how to use your calculator to its full capacity.

While many of the advanced features are typically only used by financial analysts, everyone should familiarize themselves with the basic features. It is a force multiplier that will make you financially stronger by using it. We feel strongly everyone should own a financial calculator.

First, use your financial calculator to determine how much car you can afford. Many people skip this step and end up with a huge car payment that CAUSES financial stress. Purchasing a car should not cause stress, it should relieve it by ensuring you have reliable transportation to get to work and school. As a reminder from the previous list of tips, as a college student, you are not supposed to have everything you want in life yet, so don’t get discouraged if a Ferrari doesn't fit your budget just yet. It's not supposed to.

At most, you should look to spend no more than 8% of your GROSS INCOME on a car payment. Anything more than this will put pressure on your finances elsewhere. So now, let's do some math (the fun part.) Let's say you are a college student making $16.50 per hour, working 25 hours per week. This means in an average month, you are going to make $1650, gross. We won't consider taxes at this stage, because at this level of income, they should be fairly minimal (with a single filer standard deduction, only about $7,000 of this person's income would be subject to tax, at the lowest marginal rate). If we can afford 8% of gross for a car payment, that means our max car payment is $132 per month.

If our max allowable car payment is $132, how much can we spend on a car? Let's break out our financial calculator. Let's assume we are going to take out a 5-year loan on the car (60 months) and our interest rate is 6%.  We'll assume you watched a quick YouTube tutorial on how to enter the info, so we will just help you with what to key in here:

N = 60 (number of months the loan will take to pay off)

I/YR = 0.50 (annual interest rate / 12)

PMT = 132 (this is our max payment we can afford)

FV = 0 (this will be our balance when the loan is paid off)

After we punch all this in and hit our present value (PV) button, we get a total purchase cost of $6828, approximately. This means that based on our income, the most we should finance is $6,828. A quick search on CarMax shows there is plenty of vehicle inventory at the $9,000-$10,000 range, and shopping around at local dealerships, you might even find a better deal than this. At a $9,000 price point, you would need a down payment of $2,172, leaving your $6,828 to finance.

Now let's be clear about something. We are not saying it is easy to come up with a down payment of $2,172. You will likely have to pick up some extra hours at work or Doordash a few hours on the weekend for a few months to build up this kind of cash. Also, a $10,000 car is not a dream car by any means. However, by thinking about the numbers in this way, you will prevent yourself from purchasing a car that puts strain on your budget and creates financial stress.

Pro Tip: We have the ability to exert some control over one of our inputs in the last calculation. We assumed an interest rate of 6%. The higher the interest rate, the higher our payment. This means higher rates reduce the amount of car we can afford for a given level of income. But if we could get a lower interest rate, this would mean that we could afford more car or have a lower payment, right? We are glad you asked. BEFORE you go to the dealership, go to your bank (again, we are assuming the reader has completed the steps from our original tips and has a checking and savings account with a bank). Ask for a pre-approval letter for an auto loan. If you have completed the aforementioned exercise on your financial calculator, you should be able to get approved based on income.

Assuming you get approved, take the letter to dealerships when you go shop. Tell them you are interested in dealer financing FIRST and find out what rate they are offering. Once they give you their number, even if it is lower than what you got approved at the bank for, tell them you are pre-approved through your bank and you are more comfortable working with your bank. Often times, the dealership gets origination fees for getting customers to finance through the dealership's finance division, and so they typically will bend over backwards to significantly beat your bank's rate, giving you a better deal. This is where your negotiation skills will be put to the test. Play "hard to get" for a bit and see what their best and final offer is before making any decisions. The point is that by knowing your numbers and knowing how the game is played, you have the potential to get a reduced interest rate. This either means you will have a lower monthly payment or you can get a little more car for your money. Your individual circumstances and budget will determine which way to go on that.

The Roth IRA is one of the most versatile financial tools available to investors. It is a type of account that allows you to contribute after-tax dollars (money from your paycheck that was already taxed), invest and if you follow certain rules, the earnings on the investments are income tax free forever. Let first emphatically restate the following: You must purchase investments like stocks, bonds, mutual funds or ETF’s inside of your Roth IRA. All too often, people say they bought a Roth IRA at their bank and what happened was they put money into the Roth, didn’t specify any investments and so the bank just stuck their money in a money market account yielding a very low interest rate. Typically, Roth IRAs are used for building long term wealth, so stocks and bonds are a more appropriate investment, specifically for young people. Make sure you invest the money.

So why is the Roth IRA so powerful? Well, there are several reasons, but we will focus on just one for now. We might anecdotally say 90% of people don't know that Roth IRA contributions (sometimes called basis) can be distributed from the account any time, tax and penalty free. Earnings can be distributed tax and penalty free as long as you meet two criteria: 1) you are age 59.5 or older and 2) you have had the account open for more than 5 years. This second reason is why it is so advantageous to get a Roth IRA open as soon as possible, to start the clock.

To help understand how these rules work, let’s look at an example. John, 23, contributes $5,000 into his Roth IRA and then invests the cash into an index fund. After 3 years, the investment has grown to $7,500. John is looking to buy his first house and needs money for a down payment. John may sell two-thirds of his index fund shares to raise the $5,000 cash, and then distribute the cash out of the Roth IRA. Since John originally funded the account with $5,000 (his basis), this distributions is not taxable, nor does he pay any penalties. It was his after-tax money. The other one-third of his shares can be left invested in the Roth IRA. After the distribution, his basis in the Roth is now $0, meaning the remaining $2,500 is considered earnings. If he distributes this before meeting the two aforementioned criteria, he will have to pay taxes on the $2500 plus a 10% penalty for early withdrawal. However, if he left the shares invested and waited to withdrawal any of that money until age 59.5, the distribution on the earnings are tax and penalty free as well.

Why is this so significant? Because many people save money. However, if you are saving in a bank account, you are getting a very small amount of interest, which also is being taxed. In a Roth IRA, you can purchase growth investments and the earnings can be allowed to compound without interruption for long periods of time. The principal can compound for long periods too, but if you ever need it, you can still access your principal. Caveat: Investments can lose principal, unlike cash in the bank, so you should not invest money you know you are going to need soon in risky investments. That money should be in your emergency fund, which we discuss in our 11 tips above. This strategy is better for money you don't think you will need for a while.

This is a topic that frustrates many people. There are significant, credible and nuanced arguments against the current system of credit scoring that go beyond the scope of this article. For now, we will focus on how the current system works and how you can work to get the best score possible. Why is this important? Because a better credit score reduces your cost to borrow money, which is a significant advantage in life. Most notably, the total cost of purchasing a home is less for people with good credit scores.

Homeownership is a significant step on the path to wealth, so this is a serious matter which deserves your attention, even while you are in college and just starting out.

There are several consumer credit rating agencies and each one uses a slightly different formula. According to Experian, there are five primary factors that will determine your credit score:

1. Payment History (35% of your score) – This is an evaluation of whether you make payments on time or make late payments. This is the largest single factor.
   
   
   
2. Amounts owed (30% of your score) – This is graded based on something called utilization rate. Let's use an example to show how this is calculated. Let's say you have a credit card with a $3,000 spending limit. You make purchased on this card of $2,000. $2,000/$3,000 = 67%. Your utilization rate is 67%. Any time your utilization rate goes above 30%, your credit is negatively impacted.
   
   Effectively, you should take whatever your credit limit is, divide it by 3 and use this number as a self-imposed cap for utilization. In the above example, with a $3,000 credit limit, you should strive to never spend more than $1,000 on that card.
   
   
   
3. Credit History Length (15% of your score) – No secret sauce here, it's just about time in the game. The longer you maintain healthy credit accounts, the better this portion of your score will be.
   
   
   
4. Credit mix. (10% of your score) – To get the top scores, you want a diverse portfolio of credit. This means a credit card, an auto loan, a mortgage, student loans and other loans. This makes intuitive sense, though it also can be a source of frustration for some. We commonly hear the question, "How can I build credit if I can't get any?" There is no secret hack here, you just have to start small and build up over time. This is true in all things in life, credibility in anything takes time to build. Be patient and focus on things you can control.
   
   
   
5. New Credit (10% of your score) – Recently opened accounts or even hard inquiries (often referred to as "hard credit pulls" or "running your credit") can hurt your score in the short run. This one can be devastating if you don't understand it. We have seen instances where an individual is in the process of buying a house and doesn't understand that a lender is constantly monitoring your credit up to the day you close on the loan and take ownership of the home. There have been instances where an unknowing individual went to a furniture store weeks before closing and opened a line of credit to purchase furniture and schedule to have it shipped to the home on move in day. The bank saw this purchase and they were unable to close on the loan. Even as a college student, it is important to begin to understand how credit works so you can control the narrative and get the best score possible.

Financial literacy is an important topic. One great way to help build your knowledge is to read books on financial literacy. This will force you to build your financial vocabulary. You will begin to understand phrases like "taxable equivalent yield," "risk-adjusted return" and "value at risk." You will begin to be able to sort through the alphabet soup of financial acronyms like "APR," "CAPM" and "WACC." Perhaps someday you will even feel comfortable knowing whether you should hire a CPA, CFP® or AEP®, depending on what area of financial planning you are having questions about.

We have two recommendations for how to get started. First, read books about personal finance or related topics that will help you build skills necessary for making good financial decisions. Here are some wonderful books:

1. "The Psychology of Money" by Morgan Housel
   
   
2. "Just Keep Buying" by Nick Maggiulli
   
   
3. "Stocks for the Long Run" by Jeremy Siegel
   
   
4. "The Psychology of Investing" by John Nofsinger
   
   
5. "Retirement Planning Guidebook" by Wade Pfau
   
   
6. "The Little Book of Common Sense Investing" by Jack Bogle
   
   
7. "Big Mistakes: The Best Investors and Their Worst Investments" by Michael Batnick
   
   
8. "I Will Teach You to Be Rich" by Ramit Sethi
   
   
9. "Mind Over Money" by Brad Klontz
   
   
10. "Thinking in Bets" by Annie Duke 

Second, we recommend watching business new channels like CNBC or Bloomberg. Not to get specific advice, because much of what you will see on TV is not actionable. The point of watching these channels is to build financial fluency. You will hear terms like "put/call ratios," "advance/decline" or "the Vix." If you are a naturally curious person, hearing things like this will lead to additional investigation and help improve financial literacy. It will feel like drinking from a fire hose for a bit because they talk fast and much of it is technical jargon. That's OK, dive in and immerse yourself, and soon you will understand much of what is going on and some of it will be very relevant to your life.