7 financial lessons for college students

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By John Egan

When it comes to financial responsibility, college students aren’t necessarily practicing what’s been preached — over and over — to them.

A study published recently in Britain’s International Journal of Behavioural Accounting and Finance found that U.S. college students are fully aware of the need to be financially responsible but are “susceptible to lapses in self-control” when it comes to using credit cards. Researchers say the students’ “naiveté leaves them vulnerable to the perils of excess debt.”

To counteract that naiveté, here are seven tips on how to keep from flunking out of the School of Financial Responsibility.

1. Tame your credit card debt.

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Experts say it’s imperative for college students to avoid racking up massive amounts of debt on their credit cards. Michael Clark, a certified financial planner in Orlando, Florida, recommends that college students pull credit cards out of their wallets only in emergencies.

“If students begin maxing out credit cards and building a tremendous debt as early as college, it’s a tunnel they may never find themselves out of well into their late 20s and early 30s,” says Eyal Fruchtman, CEO of the Clink investment platform.

AJ Smith, a personal finance expert at personal finance website SmartAsset, cautions against avoiding credit cards altogether, as it’s important to build a credit history.

But how do you head off the debt monster if you’ve got credit cards? Smith suggests paying off credit card balances in full every month. Be sure to pay all credit card bills on time; failing to do so can harm your credit score. By the way, the same goes for all of your bills, not just the ones for credit cards.

“Poor credit can be a serious obstacle in the future when you’re ready to buy a home or car,” Smith says.

Whitney Lee, a financial adviser at oXYGen Financial in Atlanta, points out that simply putting a $5 Starbucks latte on your credit card one morning a week, then paying off that purchase on time, will help you amass a credit history — more so, she says, than struggling to pay sky-high credit card bills every month.

2. Set a budget.

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You’re probably already doing math in your classes, but doing some budgetary homework can put you on the path toward a degree in financial responsibility.

In the positive column, a college student’s budget should take into account income like paychecks, loans, and allowances from Mom and Dad, according to Smith. Expenses such as tuition, books, rent, food and travel should be marked in the negative column. In the end, of course, you want the total in the positive column to be higher than the total in the negative column.

“Keeping track of your finances can give you a clearer picture of what you’re spending, what you’re saving and how it all affects your goals,” Smith says. “If you find yourself going over your budget, try re-evaluating it or making changes to your spending patterns or income amount.”

For instance, you might need to cut back on your pizza-and-beer tab.

Kevin Gallegos, vice president of Phoenix operations for debt services provider Freedom Financial Network, notes that budgeting doesn’t have to be a chore and doesn’t require fancy software. An Excel spreadsheet or good old paper and pencil will get the job done, he says.

No matter which method you use, you’ll be ahead of the game. Just 39 percent of college students responding to a survey earlier this year said they adhered to a monthly budget.

3. Don’t load up on student loans.

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It can be tempting to take out tens of thousands of dollars worth of student loans. At the time, it feels like free money. But you’ve eventually got to pay back those loans — loans that add up fast.

In the U.S., members of the Class of 2015 graduated from college with an average student loan debt of more than $35,000. Sadly, 30 percent of student loan holders surveyed in 2015 confessed they’d sell one of their organs if it meant they could wipe out their debt.

If possible, start paying off your student loans before you earn your diploma so you can ease the post-college financial burden, says Mike Falco, a financial adviser at Falco Wealth Management in Berwyn, Pennsylvania. See related information about student loans and credit score.

4. Be frugal.

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Focus on the necessities, not the luxuries. You certainly need a roof over your head and food in your stomach, but is a new Apple Watch absolutely necessary? (The short answer on the watch: No.)

“College students should determine what they truly need and ensure that they will be able to pay off any debts that are completely necessary in a reasonable time frame,” says Grant Moore, a financial adviser with Rockford, Illinois-based wealth management firm Savant Capital Management.

It’s OK to splurge from time to time if you’ve got the extra cash, but you shouldn’t run up your credit card balance just so you can brag to your besties about the latest gadget you picked up at Best Buy. Before you swipe that credit card, think about the consequences.

In the end, it pays to live like a cash-strapped college student instead of a trust-fund baby.

“Those who live modestly during these years of early adulthood can better ensure that they will begin their careers in a good place, rather than constantly having the stress and pressure that high debt payments can create,” Moore says.

5. Ask questions.

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Be sure you’re familiar with the terms of your credit cards or loans, Moore says. What is the interest rate? What is the monthly payment? What is the schedule for paying off the debt?

6. Watch those fees.

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Choose a checking or savings account with low or no fees so you can put extra money in your pocket, experts say. For example, you might be able to open an account at a bank or credit union that forgives fees when you withdraw money from an ATM outside its network.

7. Stash some cash.

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If you’re holding down a job, carve out 10 percent of your paycheck and deposit those bucks into an interest-bearing savings or money market account, Gallegos says. Do the same with money from Mom and Dad. Aim to accumulate enough dough to cover your expenses for three to six months if an emergency arises, he says.

If you find yourself with a stockpile beyond what’d need in an emergency, consider rolling the extra money into an investment portfolio. Even small sums of money invested in early adulthood can result in thousands of dollars when you’re knee-deep in your career, according to Lee.

“It’s important for college students to take control of their financial future by saving wherever and whenever they can,” says Chris Kieffer, senior vice president at First Bank in St. Louis.

About the Author

John Egan is a personal finance writer who has written extensively for publications such as BankRate, Credit Karma and Lending Tree.

Written on December 3, 2015

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