Solid money management skills don’t come out of nowhere and many young adults don't learn this information in high school. Like anything in life, it’s a skill that takes time to learn and cultivate. To help you out, here are five things every student should know about how to successfully manage money.
1. Why Saving Money is Important
Putting money away in a savings account gives you a financial cushion, whether you receive help from your parents or are putting yourself through college. Even with all the expenses it takes to get your degree, there are still ways you can save money.
For starters, cut back on your textbook expenses by either buying used copies or renting the book from the publisher. The average textbook costs over $105, while a used version is just a fraction of the cost. When the semester is over, resell your books. Then you can either put the money in a savings account or use the cash to help fund next semester’s course materials.
Another way to save in college is to know where you’re going to eat. If you have a meal plan, make sure you use it instead of purchasing meals on the go, even if it’s more convenient. That doesn’t mean you can never go out to eat with friends, but you should have an idea of how frequently you can afford to do so. If you don’t have a meal plan for on campus dining, start grocery shopping for meals you can easily prepare in your dorm or apartment kitchen. When you do go out, check for student discounts at restaurants, stores, and entertainment venues.
2. How to Use Credit Cards Responsibly
When you start getting credit cards, it’s tempting to use it for "wants" instead of "needs." Do this, and before you know it, you will have accumulated some sizable debt. When you may already be taking out student loans to finance your education, adding a credit card balance can add to your financial stress.
You can, however, use your credit card responsibly to start building a positive credit history, which is partially used to calculate your credit score. The longer your accounts are open, the better your score will be. Plus, paying your bills on time also helps to improve your score.
Just remember to pay off your balance in full. Not only will it cost you more in interest to carry a balance, but you can also damage your credit score if you max out your credit cards . By using all your available credit, it will increase your credit utilization ratio. By building a positive credit history, you’ll qualify for lower interest rates on future loans (like a car loan or mortgage) to help lower your monthly payments.
3. Understand the Impact of Interest
If you must borrow money to spend money, make sure you understand what you’re getting yourself into. All borrowed money accumulates interest, which is money paid to the financing company (like a lender or credit card company). Rates are usually advertised as an annual amount, but interest accrues daily on unpaid credit card balances.
Today, the average credit card’s annual percentage rate (APR) is 27.82%. Let’s say that’s your credit card’s APR and you charge $1,000. When your payment date rolls around, you make a payment of $100. The monthly interest rate is multiplied by your remaining balance ($900). So you’ll be charged $20.79, which is added to your balance. You can see how your credit card debt will quickly grow if you don’t stay on top of your spending.
The sooner you pay off your debts, the more money you’ll save. Reading the fine print and avoiding high interest rates and monthly fees is crucial. Otherwise, you’ll end up spending much more on your purchases than you initially thought.
4. Understand How Taxes Work
As you start to manage, earn and spend money, you’ll find yourself in new financial situations – including paying taxes. You are responsible for paying taxes on your earned income to the federal government (the IRS) and your state government (unless you live in one of the few states without state income tax).
If you work a part-time job with a formal employer, your taxes are likely withheld from your paycheck. That means the amount of money you get on payday may be smaller than you expected.
If you have a side hustle that earns $400 or more in a tax year, you are responsible for making quarterly income tax payments on your own. The IRS has due dates listed each year and you can make your payment online. Check with your state to learn how to pay your taxes. Estimating your taxes isn’t a perfect formula , so do some research or talk to an accountant to figure out the best strategy.
In addition to income tax, it’s also important to consider the cost of sales tax. You may not notice a big difference in prices when you shop or go out to eat. But sales tax can quickly increase the cost of larger purchase, like textbooks or a car. Find out your state’s salles tax rate so you can account for it in your budget.
5. Stay On Top of Your Finances with a Budget
The cornerstone of personal finance is a well thought out weekly and monthly budget that is realistic and manageable. To avoid financial situations where you suddenly don’t have enough for rent or bills, you must know how much money is coming in from income or other sources, and what upcoming expenses you need to cover. Map out every expense and bill you have, then give yourself a budget for non-necessities like food and going out.
The best way to stay on top of a budget is to track it on a regular basis. You can create budget categories in Excel or Google Sheets. Or you can download a mobile app that automatically categorizes and track your spending. Either way, you still need to set aside some time to review your spending. Set a time either daily or weekly to review your bank account and adjust your upcoming spending plans if needed.
Financial Takeaways for College Students
Financial savviness takes work and involves more than getting a well-paying job after graduation. No matter what your income level is, it’s important to take care of your money and make good financial decisions. As your knowledge grows, so, too, will your financial independence. Start now in college and you’ll have the skills you really need throughout life.