Finance 101: Student Edition

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They say money can’t buy happiness (and we agree!), but being equipped to put yourself in a healthy position financially can aid you immensely in reaching your long-term goals. As a student, it’s very common to not have a lot of resources. You might find yourself often running out of money, struggling to file your taxes, or even going into credit card debt (eek!). And that’s not even including the confusion of more unstable concepts like investing! However, while you may be a full-time student, you can still achieve financial stability and set yourself up for success upon graduation!

From starting simple, like setting up your first bank account, to the more complicated steps down the road, like taxes and 401(k)s, this blog post will help set you on the right track! Keep reading for our essential finance tips.

Financial Health: Set Up and Manage a Bank Account

In order to manage your money, the first tool you’ll need is a bank account. If you’re in high school, we recommend starting off with a debit card and a savings account. However, once you want to become a little more financially savvy, opening up your first checking account is the way to go. Luckily, as a student, banks often have student plans that make it easy for you to manage one! Here’s what to look for!

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How to Find the Best Bank for You

Oftentimes, banks will charge their customers a maintenance fee to hold an account with them. You can actually wave this by keeping an eye out for different student plans! Some great banks for students include Bank of America and Chase.

Here are some great characteristics to look for to find the best bank for you:

  1. $0 maintenance fees
    a. These are included in a lot of student plans!
  2. $0 or low minimum account balances
    a. As a student, you may not have a lot in your account. In fact, you might have nothing at some points. Look for accounts that allow you to have very little in them without charging you an additional fee.
  3. A mobile app
    a. Don’t underestimate this! A bank with a good mobile app can make it so much easier to check your account balances, transfer money on the go, or pay your credit card bill on time.
  4. ATM access
    a. Look for banks that have ATMs in your area! This could potentially help you save money on ATM fees should you have to use another bank’s ATM.
  5. Hidden Fees
    a. Make sure to read as much as you can about plans. Sometimes banks charge you fees for transferring your money a certain amount a month or using another bank’s ATM. This can rack up money, so be aware!
  6. Low-interest rate
    a. Should you forget to pay your credit card bill on time (which in general, never do!), you don’t want to be hit with a huge interest charge.
    b. The average interest rate for student accounts is 15.38% APR while all-new offers are 18.24% APR.
    APR stands for Average Percentage Rate. AKA how much interest your account has over the course of a year! However, the actual rate actually stands for how much interest you get charged a day (so a 15.38% APR is 15.38% interest charged every day!).
    c. Confusing? Just remember: lower APR = more money for you! Even better, pay off your credit card each month so you never have to pay interest in the first place!

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To open a checking account, you’ll likely have to show a few forms of identification, your social security number, and proof you’re a student for a student plan. If you go in person, an employee at the bank can sit down with you and help you through the process. We highly recommend going this route if your bank allows it – it makes it so much easier to apply as a beginner and as you’re able to ask any questions and receive explanations in real time!

How to Manage Your First Checking Account

Now that you have your first checking account, you need to know how to manage it. These steps will be vital for ensuring your financial growth.

1. Always Pay Off Your Credit Card Bill

The cardinal rule of having a credit card is always paying it off in full, every billing cycle (which is typically a month). In order to do that, it means you cannot put more than you can afford onto the credit card. In fact, it’s actually recommended that you don’t exceed more than a third of your credit limit.

If you forget, not only will you be hit with late fees, but your credit score will also take a hit. But wait, what’s a credit score? Why is it important?

2. What’s Credit and How to Build It

Let’s use this scenario: you and your two friends are out getting boba and they both forget their wallets (what a coincidence!). In deciding to lend them money, you probably care if they’re going to pay you back, right? Let’s say one friend has a terrible reputation and never pays you back, but the other one always pays you back on time. Which friend are you more likely to lend your money to?

This is similar to having a bad or good credit score. A credit score lets the bank know how “trustworthy” you are and indicates that they can safely lend you money and expect to get it back when you repay them.

Your credit score (or “trustworthiness”) is really important in that it can help you qualify for mortgages, larger credit limits, auto loans, student loans, lower interest rates, and more. While some of these things may seem years or even a decade away, building good credit takes time and there’s no better time to start in my opinion than now!

You don’t even need to have a lot of money coming in and out to start building credit. Every month, buy one coffee with your credit card, pay it off, and you’ll start building good credit!

However, to help build up a good credit score, is it recommended to use no more than 30% of your credit limit. In fact, those with the highest credit scores only use around 7% of their monthly credit limit.

Another good tip: if you forget or almost forget to pay off your credit card bill each month, you can pay it off twice a month or more. Whatever it takes, be sure to not miss your monthly credit card payment each month – that’s what hurts your credit score and gives you late fees.

Avoid Signing Up for Other Credit Cards

This is the biggest trap, for college students especially! Companies with high-interest rate credit cards and high overdraft fees specifically target college students who are typically not as financially savvy. They know that they’re more likely to overdraft, not pay their bill, or go over their credit limit, and therefore, are prime targets for lots of fees.

The next time you see a table with free pizza, t-shirts, or more and they’re trying to get you to sign up for another credit card…run (preferably with the free pizza in hand). Stick to one credit card – the one you researched with low fees and that you know you can manage.

Put Money into a Savings Account

Start saving for larger purchases (like a Spring break trip)

  • Aim to have money left over for when you graduate
  • Savings accounts have interest rates so your money will grow – they’re often small, but it’s better than sitting under a mattress

Financial Health: Start Contributing to Your Account

Finding a Part-Time Job

You’re likely super busy as a student, but having a part-time job, even if it’s only a few hours a week, can help you afford additional living expenses. Things like books, transportation, going out with friends, a Mother’s Day gift, etc. can become available to you with a part-time job.

Typically, colleges will offer different on-campus employment opportunities, from working in the library to tutoring to giving tours to conducting student research. These are not only great ways to earn money, but also allow you to give back and connect to your campus community while gaining on the job experience.

If there’s a lack of on-campus opportunities, online tutoring can be a great way to go. You’ll be able to set your own hours and work as much or as little as you want. This can be super beneficial during finals week when you don’t have a lot of time to commit. Even more so, teaching someone else is the best way to learn! As you explain a concept to someone else, you’ll reinforce concepts for yourself along the way.

In looking at part-time jobs, evaluating the following questions can aid in your decisions:

  1. How much time can you commit to?
  2. Does the job help you grow your skills or development?
  3. Does it contribute to your long-term goals?
  4. Can you grow in responsibility?
  5. Do you get along well with the manager and co-workers?
  6. Do you believe in the mission, purpose, or effect of your work?
  7. Is the workplace environment welcoming, supportive, respectful, and safe?

This last question is very important. While your very first job by no means has to be glamorous or your “dream job,” your workplace should always be respectful and appreciative of you and your work.

Financial Health: Paying Taxes

Now that you have a part-time job and are earning some income, you need to learn how to pay taxes. When talking with first-time taxpayers, my advice is to use a service that largely does the work for you instead of working it out yourself on paper.

One service we recommend is TurboTax. They often have free plans for simple tax returns (which you’ll most likely have) and even offer deals if you file by a certain date!

The website makes it very easy to get started and they include lots of helpful explanations along the way to help get you through.

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Here’s our short synopsis of the tax-paying process:

  1. Your part-time job will likely send you a W-2 form
    a. Keep these copies on hand.
    b. When it comes time to file your taxes, TurboTax will prompt you to enter several numbers found on this form.
    c. If your employer does not send you a W-2, contact them! The one exception is if:
  2. You work as an independent contractor
    a. This means you’re self-employed and your employer and you have a “contract” where you’re paid for specific work, and your employer will send you a 1099 form
    b. Your employer does not pay your taxes in this case – you do
    c. Your taxes will be a little more complicated
    d. Pro Tip: you can actually track and receive a refund for business expenses! Do you own a laptop that you work on for this job? That counts! Do you drive at all for your job? Your gas money can count!
    e. By writing off business expenses you can maximize your tax refund.
  3. The deadline for filing taxes is usually April 15th, but for some circumstances (like COVID-19) the deadline can be extended.
  4. Tax Refund
    a. After you file your taxes, the government will likely send you a tax refund. This is when they’ve taken out too much money than you really owe.
    b. Be sure to file on time to receive it!

Like all things, filing taxes comes with a learning curve. After all, this is a new responsibility you are in charge of! So, what happens if you do your taxes incorrectly?

I Got Audited – Now What?

When you’re doing your taxes, especially your first time when you’re more prone to make mistakes, you may be audited.

Auditing means the IRS will take a closer look at your tax returns and make sure you’re reporting everything correctly. While the IRS audits people randomly, they also do it if anything on their end raises a red flag. You’ll know if you’re audited if you receive a letter in the mail from the IRS. The letter will include instructions for extra documents that you need to submit by a certain deadline.

First thing to do – take a deep breath. Remember you’re only human and that you may have made a mistake on your taxes as a first-time filer. Next, look for the documentation requested. You may have to show copies of your salary, payments, bank account information, and more.

Just submit your documents by the date and you should be fine!

Financial Health: Saving

Now that we’ve discussed earning and saving money, let’s talk about saving! As a college student, you may not have as many expenses as an adult. However, you still likely need to buy books, clothes, transportation, food, and have some extra money to go out with friends.

While it is very true that most college students don’t have much to their name, 34% of college students have been able to save at least $1,000. Having money in your account not only means you can afford bigger expenses like a spring break trip or plane tickets back home, but can greatly help you when you step into the world as a new college graduate.

Having some savings means you can pay a first-month’s deposit or a brokerage fee when you’re renting your first apartment (and have money to furnish it!). Savings can enable you to put down a better down payment on a car, and therefore have lower interest rates and save money over time. Having savings will also just give you the peace of mind when you’re already starting out new.

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How to Set a Budget

While this rule is simple, it is the foundation to building up savings: You need to spend less than you’re making.

First, put aside enough money to cover your necessary living expenses, otherwise known as “mandatory spending.” These are the expenses that you actually cannot go without. Some of the expenses under this category may include:

  1. Room/board
  2. Tuition contributions
  3. Books/Supplies
  4. Transportation
  5. Food
  6. Medicine/toiletries

Now, after you’ve covered your basic expenses, put 10% of what you’re making away before you do anything else. This will ensure that you are saving, no matter what.

With the leftover amount you have, that is your “fun money” or “discretionary spending.” Examples include concert tickets, extra clothes, video games, eating out at restaurants, etc. There are the expenses that are more largely under your control and that can be limited. Setting some basic rules will also help you limit these expenses. Rules like “I’m only going out to eat once a week” or “I’m going to the movies twice a month” can be easily followed and can simplify your discretionary spending to what you can manage.

Resources to Help You

If you’re new to budgeting, we highly recommend using a mobile app. By automating the work and doing the data crunching and purchase analysis for you, you’ll be able to easily see where you’re spending is going to and therefore, make better spending decisions going forward. Here are a few of our favorites!

  1. Mint: #1 most downloaded personal finance app that’s free
  2. YNAB (You Need a Budget): Students get 12-months free!
  3. PocketGuard: Another solid free budget app
  4. Goodbudget: Uses the envelope system, where you set a budget by categories

Look for Deals Whenever You Can

A good part of budgeting is also knowing where to find a deal. While these methods may not be the most convenient option, putting in extra time and care when you’re purchasing something can save you money in the long run.

For instance, buying or even renting new textbooks from your college bookstore can be very expensive. Try asking around on campus social media groups to buy or rent another student’s textbook. You might have to deal with notes in the margins, but can definitely be worth it to save you money!

Also, as a student you are eligible for a lot of student discounts. Concert, theatre, and sporting event tickets usually have some sort of student discount. For consumer products, you can sign up to UNiDAYS to see student discounts for popular brands all in one place!

Financial Health: Invest in Yourself – Literally!

Did you know that there’s a way to make almost $2 million dollars without spending a dime?

Yep – it’s called a 401(k). In fact, if you invested $6,000 a year for 40 years, you would have more than $2 million dollars by the time of retirement! Use a 401(k) calculator to gain an even more personalized estimate!

Now that we’ve covered earning, saving, and spending, we need to discuss investing. Investing is a way to make your money grow itself without any active effort on your part and is a key way to achieve financial freedom. While you may think investing may be unachievable for college students, that couldn’t be further from the truth. You don’t need a lot to invest and just by investing at all, you’ll be practicing and learning healthy financial habits!

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Reasons to Start Investing Now

One key reason to invest early is that the earlier you invest, the more your money will grow. Due to compounding, the longer you let your investments sit, the larger returns you will see as time goes on.

Another key reason to invest is that by not doing so, you are actually losing money. This is because the inflation rate is more than the interest rate of your money sitting in the bank! For instance, you may have a 1% interest rate in your savings account (which is on the high end) meaning your account will grow 1% per year. Inflation, on the other hand, is around 2% a year. You’re actively losing the value of your money by not investing!

How to Start Investing

The first step to start investing is to open a brokerage account. You need a broker to help purchase investments such as stocks, ETFs, mutual funds, or bonds. There’s a lot of great brokerage account options available, but we recommend TD Ameritrade for beginners. They are primarily rated as being one of the best brokerage accounts for beginners as they have a lot of educational resources available for free on their website, an easy-to-use mobile app, and a paper trading platform. “Paper trading” is when you get to practice investing in real time…except you’re using fake money! This can be a risk-free way to practice investing and decision making before putting your own money on the table.

How to Pick Investments

Now that you have your brokerage account, it’s time to invest! First, you need to know the basic types of investments.

Types of Investments:

  1. ETFs: Often tracks indexes passively of multiple companies; diversified risk. Instead of buying a share of just one company, you’re buying a share of a whole bunch of companies!
  2. Mutual Funds: Managed by an investor actively; similar to an ETF in that it’s diversified risk
  3. Bonds: Low risk, low return; by the government
  4. Stocks: High risk but high return; concentrated risk into one company (ex: Apple, Tesla)

For beginners, ETFs or Mutual Funds can be great options because they allow you to diversify your portfolio and therefore, lower risk. Instead of putting all your eggs in one basket, so-to-speak, by buying stocks from one company, instead you can buy a share of multiple baskets!

Warren Buffett actually believes this is the best way to invest in the first place. As he said, “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”

He even took a bet that placing money in a basic S&P index fund that is passively managed would outperform one a fund actively managed by professional hedge managers…and he won!

Stop…Before You Invest!

Before you place any investments though, research is essential to ensuring you make the best decision. Here’s a few questions you may ask:

  1. Who is the leadership?
  2. How has the company’s or companies’ performance been?
  3. Are there any upcoming or current trends in the industry that might affect performance?
  4. How might new government regulations come into play?

Before investing, you might also want to take some time to reflect upon your own values. Do you care about green energy? Are you passionate about space exploration? Do new plant-based meat substitutes excite you in the market? Anything that you are passionate about or believe in, there is a stock, index, or mutual fund for it!

Financial Health: Learn More About Personal Finance

Learning about finances and financial health is a life-long journey! While we hope this blog post provided a helpful roadmap, here are some further resources to use.

Books Can Be a Great Way to Learn

  1. Rich Dad, Poor Dad by Robert Kiyosaki
  2. Broke Millennial by Erin Lowry
  3. Clever Girl Finance by Bola Sokunbi
  4. Your Money or Your Life by Vicki Robin & Joe Dominguez

Podcasts

  1. The Fairer Cents
  2. The College Investor
  3. So Money
  4. How to Money

Free Online Courses

  1. Personal Finance 101: Everything You Need to Know via Udemy
  2. Personal Finance from Purdue University via Edx
  3. Financial Literacy via Allison
  4. My Financial Mountain: Understanding Your Path to a Solid Financial Foundation via Skillshare
  5. Finance and Capital Markets on Khan Academy

YouTube Channels

  1. Graham Stephan
  2. Marko Whiteboard Finance
  3. Lydia Senn
  4. The Broken Wallet
  5. Miss BeHelpful

Building a Financial Foundation

While we definitely agree that money cannot buy happiness and shouldn’t be your primary focus, building healthy financial habits and making wise financial decisions can help you down the road to your dreams! Being a student presents its own set of challenges – but there is truly no better time to start taking control of your finances (and your life!) than right now by educating yourself, practicing healthy financial habits, and developing your financial literacy.

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