College is an exciting and challenging undertaking for most students. Moving away from mom and dad, living on your own (or with a roommate), making decisions for yourself and having to manage your own finances are just a few of the roadblocks you will be facing. Having a plan in place beforehand and sticking to that plan as closely as possible can help to ensure that you survive the transition with the least stress possible. Here's how to build a strong financial foundation during your college years.
Start With Your Expenses and Budgeting
One of the first and most important steps for successfully managing money as a college student is to truly understand your expenses. It's likely that you've never had to budget your own money before if you’ve lived with your parents your whole life. It can come as quite a shock the first time you’re faced with the harsh reality that there are limits on what you can spend. But, you can soften the blow by learning the basics of budgeting.
1. Creating a Budget
A budget is simply a plan for how you'll spend your money each month. To make your first budget in college, start by making a list of your fixed expenses, such as rent, tuition, books, car payments, utilities, and food. Next, make a list of your discretionary expenses such as clothing and entertainment. Add both your fixed and discretionary spending together, then subtract that from your income to make a basic budget. Your income includes the money you earn from working, student loan refund checks, side hustle earnings and any money your parents may provide regularly.
If you have no clue what you're spending in these areas, you may want to sync your bank account to a budgeting app to track your purchases. That way, you can easily see where your dollars are going. Until you know what your monthly expenditures are and what you're spending the most money on, you'll have a harder time making a realistic budget to work with.
2. Learn to Live Within Your Means
A budget helps you see what you're spending so you can avoid going into debt to maintain your lifestyle. As a college student, expensive electronics, going out with your friends and eating out multiple times a week are likely going to become a thing of the past. Make sure that you're meeting your financial obligations before you start to spend on frivolous items that aren’t necessary for your survival. Remember, college is probably going to be a time of your life when you make very little money, so you had better be prepared to make some sacrifices.
3. Try to Avoid Accumulating Debt Whenever Possible
Debt can quickly become overwhelming and will likely follow you for years beyond college. Keep a single credit card on hand for emergencies, but try to avoid using it for anything that isn’t absolutely necessary. If you're going to use credit for purchases, only charge what you can afford to pay off in full each month. This can help you avoid interest charges and it can also help you to grow your credit score.
Improving your credit score is important because once you graduate, you may want to rent an apartment, get a loan to buy a car or eventually buy a home. Your credit score matters for those types of financial moves and the stronger your score, the easier it may be to get approved and get the best interest rates on loans.
Preparing for the Future
While you're thinking about your spending, it's also important to give some attention to saving. It's never too soon to begin saving an emergency fund, putting aside money for a down payment on a home or even thinking about retirement. An emergency fund can rescue you when you have an unexpected expense and the sooner you begin setting money aside for retirement, the longer it has to grow.
Even if it's a small amount, say $25, putting a little bit away with each paycheck will begin to accumulate over time and provide you with a much-needed cushion if you’re put in a position where you need it. The earlier in your life you begin to save, the better off you'll be when it comes to having money saved for small financial emergencies and the big expenses in life, including retirement.
Don’t fall into the trap of thinking you can just wait until you graduate and get your dream job before taking your finances seriously. Life doesn’t always work out as planned and time is your greatest asset when it comes to saving money. Even if it doesn’t seem like the few bucks a week you’re saving in college is a lot, you'll thank yourself after graduation. And once you're beginning your first job, you can continue adding to your savings by adjusting your budget to account for a (hopefully) higher income and taking advantage of employer benefits, like a 401(k) plan.
Managing real-life expenses and trying to save for your long-term financial goals are difficult tasks for most people, not just college students. Establishing yourself as a responsible adult at a young age will help to lay the foundation for a secure financial future.