As college students, we are all over the place in regard to our financial situations. I have some friends that own thousands of dollars in stocks already and have thousands of dollars saved toward retirement, others that aren't in debt, but are still living paycheck to paycheck, and still others who are carrying a lot of student loan debt because they're paying for college themselves. Most of us are somewhere in the middle of this spectrum. Of course, a lot of where you are financially is somewhat outside of your control—the ones with all the savings and stocks do tend to be from richer families, and the ones who are paying for college themselves tend not to be, and none of us get to choose our family's financial situation. However, regardless of where you are, there are easy steps you can take while still in school toward the financial future you're dreaming of.
1. Get a credit card and use it responsibly.
I came from a family where this was discouraged, as my parents pay cash for everything—cars, college, even our house. I haven't seen them finance anything except for their first home, which was paid off long ago.
However, after doing some of my own research, I realized that with responsible use, a credit card can help you build a good credit score, which will, in turn, benefit you with more favorable mortgage terms when you buy a house. And Dave Ramsey might not like that, but I would personally much rather build equity in my own home than rent apartments until I'm 50 and have $150,000 in the bank. So I applied for and received a credit card so that I could begin to build credit, as I have a goal of buying my first home within three to five years of graduation. I put all my normal purchases on my credit card and then pay it off frequently, treating it like a debit card in that my credit card balance can absolutely never exceed the amount in my checking account. After 6 months, I always recommend people get another credit card, use them both, and continue to pay them both off often, since the higher your combined credit limit and the less of it you use, the better it is for your credit score.
Conventional wisdom says that you should pay off your card every month or whenever you get to 30% of your credit limit, whichever is first. Don't pay it off too often because if your balance owed is always $0, it will look on paper like you aren't using your card, and then there's no reason for your credit score to go up.
Of course, the flip side of this is that if you do not use your credit card responsibly and rack up a lot of credit card debt, it will be abysmal for your credit score and that will make it harder to get loans down the road. So, you should definitely only get a credit card when you are able to pay it off frequently.
Discover would be my recommendation if you are looking for a good starter card. They will give you a card even if you have no credit history, but your first credit limit will be small, around $1,500. Discover increased my credit line without me asking after 6 months because I had never missed a payment, and that impressed me. Avoid companies like "CreditOne" who exist to help people rebuild credit after bankruptcy.
Another perk of having a credit card is REWARDS. Did you know that credit card companies will pay you to make your purchases through them? They make so much money from interest payments from the less responsible credit card users that they will pay responsible credit card users just to use their card. I am currently getting 10% cash back at restaurants (part of why I chose this card--I eat a lot) and 5% on Amazon. I also get 1% on all other purchases. It is literally free money.
I just have to make one final note on what a credit card is not. I was talking to one of my coworkers when the subject of credit cards came up, and I had the opportunity to mention that I use mine like a debit card, only spending what is already in my bank account. This seems like common sense to me, but my coworker (who is my parents' age) disagreed, stating that credit cards are for those emergency expenses where you need more money than you have. I didn't say anything, but I was flabbergasted because that's what savings are for. I wouldn't judge people who are in financial hardship and pay on credit as a one-time thing, but that is NOT a good mindset to carry throughout your life at all. Moreover, credit cards are one of the most expensive ways to borrow money. One of mine has 25% interest, for crying out loud. That means that it costs $25 to borrow $100, but if you pay off your entire balance when it's due, you'll never pay a dime of that. Too many Americans are trapped in a vicious battle with the monster of their interest payments, fighting just to pay the interest, never mind the actual balance they borrowed.
2. Open a savings account, and pay yourself first.
This is probably the best thing I've ever done for myself financially. I opened a savings account with the same bank as my checking account, and each paycheck, before I do anything else, I transfer to my savings account whatever amount remained from the previous paycheck.
Some people prefer to do this by putting some percentage into savings, but I find that I always end up with more if I just pay myself the remainder. This works for me because if I allow money to accumulate in my checking account above the amount of a normal paycheck, then I will obviously think "I have a lot of money right now" and spend it.
But if I put the extra into savings, then I will see only the paycheck amount and think "Wow that is not much money for two whole weeks" and buy only what I need. And the best part is, if something unexpected comes up, I have the peace of mind of knowing I have savings and can take care of it.
3. Try to be creative to cover your fixed expenses.
We all have some expenses that are the same every month, like utilities, cell phone bill, or gas. I suggest picking some amount of your fixed expenses per month that seems realistic and making it your goal to cover that outside of your work paycheck by putting some of your spare time to work for you. I do it by trying to take extra shifts at work, which was probably time I was going to be wasting anyway. Driving for Uber or Favor is another great option that some students enjoy, although I personally wouldn't. I was surprised at how relatively easy it was to do. A couple of extra hours of work per week really can knock out some of your monthly expenses. Try it and see!
Additionally, I try to pay myself back for frivolous spending. If I buy new shoes or a new dress that I didn't really need, just because I wanted to, I try to work enough extra to cover it, if I have time. I am not a Nazi about it; I consider it more of a game, but it really does help me to have more money left over at the end of the month which I can put back into savings.
4. Two words: round ups.
There are a few good financial apps that I think every college student would benefit from having. Of course, you can't have too many apps rounding up your purchases or it will get expensive, but I suggest examining your goals and then selecting a few strategically. For those who don't know, a round-up is when an app takes out a little bit of money from your account each time you make a purchase by rounding your purchase up to the next dollar. So for example, if you spend $2.77, the app would take $0.23 from your account and apply it toward your goal, so you spent an even $3. This adds up SO FAST.
I personally keep two round-ups going: Acorns does one and invests the money for me (for retirement), and Qapital does the other and puts the money toward my savings for my down payment on a house. Mind you, there are a lot better ways to invest than using Acorns, but if you have very little time and money, it's better than nothing because you can set it to some small amount and forget it. When I graduate, I definitely plan to expand my investments significantly, but on a part-time student librarian salary that's just not realistic right now, which is ok. The important thing is to do something—anything is better than nothing.
Qapital is a fantastic app because it lets you set financial goals. You can link it to your bank account or card for round ups that go straight into your goals, set up recurring payments from your bank account (I transfer a small amount per week toward my future kids' college, which it invests similarly to Acorns) or put in money manually whenever you have it.
The great thing about these baby steps is that you don't notice them at the time, but invested money grows exponentially, so in 50 years it will definitely be noticeable. For example, if you have $0 in Acorns right now, here is what you could have in 40 years for your retirement if you start today:
And if you put in $5/week, here is your projection: (If you set it to round-ups, $5/week is a realistic estimate.)
If you sign up for Qapital here, you will get $5 toward your first goal, and I will get $5 toward my house.
If you sign up for Acorns, sign up here: It will plant a tree for you and that will help save the earth.
5. Start an IRA.
An IRA is an Individual Retirement Account. It lets you save for retirement and it invests the money you put into it so that you will see that same exponential growth I showed you in Acorns, if and only if you can leave the money in there. The nice thing about an IRA is that it won't let you withdraw a dime until you're of retirement age (I want to say 59 and a half, but don't quote me.) Seriously, the younger you start the more you're going to have when you turn 65.
There are two kinds of IRA's: traditional and Roth, and the main difference is when you pay the taxes on the money you put into it. When you put money into a traditional IRA, you will pay the taxes on it when you withdraw the money at the time of your retirement. If you have a Roth IRA, you pay the taxes on the money before you deposit it into the IRA and pay nothing when you withdraw when you retire. Obviously, you should go with a traditional IRA if you think you'll be poor when you retire, and Roth if you think you'll be rich. I have both, personally.
The Roth is a no-brainer because you don't pay taxes on the dividends. There is no good reason for anyone not to have a Roth. But I have a traditional IRA too because my dad brought up an important point: next year when I start work, as a young single professional with no dependents, I'm already going to be skinned alive on taxes, and the traditional IRA is a good way to hide some of my money from the government (at least for now.
Opening my IRA was super easy. I bank with Wells Fargo, and the link for the application was right there on the home page. The application was 100% online, took 3 minutes, and was approved the next day. There was no minimum balance, and it didn't ask for any money at all at the time I opened it. It shows up in my app right next to my savings and checking accounts, so it is very easy for me to put money in. When I get paid, 10% goes straight to my church and 10% goes into the IRA so that I don't miss it from my checking account.
There are other good ways to save for retirement. If your company has 401(k) matching, use it to its fullest extent because that's literally free money. A 401(k) is when you set aside some of your wages for retirement, and 401(k) matching is when your company matches your contributions up to a certain percent. The company I'm going to work for has 401(k) matching up to 6%, which means that if I put 3% of my wages in, they will put the other 3% in, totally from their pocket. I would be crazy not to take advantage of that.
Like I said in the beginning, college students have all different kinds of financial situations, and not all of these are going to be realistic for everyone. I understand that for someone to be able to set up round-ups or apply for a credit card does involve a certain level of financial privilege, and if you're not in that place yet, just keep plugging and doing what you're doing! Everything has a way of working out for hard-working people. But if you are in a place to start saving for your future but simply don't know where to start, I hope this article has given you some helpful ideas!