Personal finance can be something college students struggle with. Lauren is here to help. Photo by Lauren Hough.
LAUREN HOUGH | OPINION COLUMNIST | [email protected]
Foreword: I am the least qualified person to be giving you this advice — I am a sophomore economics major with nothing more than an Excel spreadsheet and binder full of credit card and bank statements to manage my finances. However, my basic understanding of budgeting and credit has set me up for financial success in the future — and it can for you, too.
The real world can be a pretty scary place, especially when it comes to figuring out how to “adult.” As many seniors near the end of their college career, the looming threat of financial responsibility and independence weighs heavily on their minds.
I am here to tell you that it’s all going to be okay. Money is, after all, just a form of currency. If you successfully balanced twelve-plus credits, extracurriculars and a social life for the past eight semesters, believe me, you can learn to understand and organize your finances — it just requires a little more learning.
Over the next two issues, I am going to walk you through five of the most important areas of finance to understand — gathered from Lacy professors and online resources like NerdWallet and Investopedia — before you run off to the real world. In both articles, I will provide an unofficial glossary of relevant terms you may come across in your plight for financial independence.
Let’s get started.
As an adult fresh off the Butler Knoll — I mean mall — the first thing you should begin to understand is what loans you have outstanding. Now, don’t be scared — “outstanding” simply means you haven’t paid it back yet. Paying off student loans is achievable if you set a plan and stick to it.
The first step to successfully paying off your loans is understanding what type of loans you have. The two basic types are federal and private student loans, but you can have a combination of both. Once you determine what type of loans you hold, you can then decide how you should go about paying them off. A great resource for determining federal loan types is the Federal Student Aid website, which will give you information about your federal loans simply by logging in with your FSA ID.
When paying off loans, it’s important to establish a consistent method and stick to it. Repayment plans are a great option. Repayment programs vary depending on the type of loan, so research methods suggested for your loan type. Some of these include standard plans that are completed within 10 years; extended plans that are paid off in 25 years; or income-based repayment plans.
Paying back loans is important to achieve financial stability. Ultimately, being responsible about loan repayment allows you to easily take out more loans with lower interest rates — we will discuss this further in the next issue.
I’m sure you’ve heard it a million times, but budgeting really is the best method for responsibly managing your finances. Start by setting financial goals for yourself — like paying off student loans, saving for a down payment on a house, or even spending less money at Starbucks — then use your budget to achieve those goals. I spoke to finance professor William Templeton for his advice on the matter.
“You don’t need to track pennies, you need to track round dollars,” Templeton said. “Getting involved in a record-keeping process and developing some goals and plans is key.”
Your budget doesn’t need to be fancy. In fact, the simpler the budget, the better. A budget should include general categories that you anticipate will make up your expenses. My personal budget includes 10 categories: savings, retirement, housing, food, insurance, debt, taxes, utilities, transportation and recreation.
However, it is important that your budget reflects your individual lifestyle. These categories might not work for everyone, and that’s perfectly fine! Nevertheless, once you make a budget, live within it. A tip: do not incur debt you can’t pay off, because it will lower your credit score — don’t panic, we’ll go over credit score in the next issue.
To start building a budget, let’s pull apart a few important categories that everyone should have.
I recommend dividing your savings into two separate entities: general savings and an emergency fund. The emergency fund is a separate account designed to put money away for a “rainy day.” The savings in this account are not drawn upon unless absolutely necessary — whether that means you lose your job, have unexpected medical bills or any other unfortunate and costly mishap.
The general savings on the other hand, can be a little more lenient. When you get a paycheck, pay yourself first by putting a certain percentage of the check into your general savings account — then forget about it. Pretend it’s not there. A “forgotten” savings account will stop you from loosely spending extra income because it is no longer “extra” money. However, it’s also important to have some fun, so don’t be afraid to reward yourself from your general savings every once in a while.
There are two general types of retirement plans: a 401k and an IRA. Many employers offer a 401k plan, and you should absolutely take advantage of this as soon as you’re eligible. If possible, I would recommend a 401k over an IRA, but there is a chance you may want both! Entering a 401k match program in which you match the amount of money that your employer pays can be an effective way to quickly build your retirement fund. But if you are paying the maximum amount of money that your 401k plan allows — or your employer doesn’t offer a 401k — it may be worth opening an IRA.
An IRA — Individual Retirement Account — is a personal account for accumulating retirement funds. Employers may also offer programs that contribute to IRA accounts as opposed to a 401k. The best part about retirement funds is that they are tax-free, which make them an incredibly effective tool for future savings!
I have just one quick tidbit about housing. Do your best to save for a down payment on a house instead of renting. Rent is a sunk cost, but houses — or rather, the land they’re on — will appreciate in value, so you will ultimately be saving money. See the glossary for more information on appreciation.
Next week, I will be covering three more important financial concepts — credit, insurance and investment. In the meantime, digest this information. Take some time to research your student loans, set financial goals for yourself and then build a budget. Most importantly, relax and know that you will be ready to adult in no time.
Glossary of Terms
Appreciation vs. Depreciation: Both of these refer to the value of an asset. If an asset — like land, stocks, or real estate — appreciates, then the value of that asset has gone up. Conversely, if it depreciates, the value goes down.
APR: The Annual Percentage Rate is a representation of interest rate that spans an entire year, as opposed to just a monthly fee.
APY: The Annual Percentage Yield is an estimated calculation of return based on a yearly compound. It is helpful for comparing accounts because unlike APR, APY considers compound rates.
Bank Account (types)
- Certificate of Deposit: CD’s are essentially savings accounts where you agree not to withdraw money for a specified period of time. After that time is up, you can take out the money plus whatever interest it’s accumulated. The interest rate is typically fixed at the time of deposit.
- Checking: a checking account is the bank account that is used for daily transactions. Checks, debit cards, credit cards, and direct deposits are often linked to checking accounts.
- Money Market: Money market accounts are sort of like checking and savings accounts combined. While you can link checks and debit cards, there are a limited number of transactions you can make each month. However, sometimes the interest rates can be higher than traditional savings accounts.
- Savings: Savings accounts are basically money storage. By putting money into a savings account, you can gain money through interest. Savings accounts differ from other account types because they make it harder to access your money.
- Interest: Interest is a portion of your loan balance that is paid back to the lender. It is a “thank you for loaning me money” that incentivizes the lender.