By Colin Hughes
As college students, naturally our first priority is school and honing our skills for after we graduate. It is hard to juggle academics, sports, and clubs; and working on top of that will keep you moving until break rolls around. Learning the fundamentals of budgeting and personal finance in college can set you on a course to achieve a financially healthy life and a timely retirement.
There are many different financial situations in which students may find themselves. Some students may pay for their college education independently, while others may pay half and some may even have their education completely funded. For this example, we will exclude the cost of tuition and campus housing.
As a general idea and rule of thumb, one of the most popular ways to break down finances is the “50-30-20 rule” This rule is a commonly known personal finance rule. It states that you can spend 50 percent of your take home income on things you need like, food, housing, transportation, etc. Next, you can spend/reserve 30 percent on things you want like clothing, trips, and entertainment.
Lastly, you should plan to save or pay debt with the remaining 20 percent. This 20 percent can also be invested if you so choose. With this last 20 percent of income, it is important to recognize the power of compound interest. Albert Einstein once exclaimed, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
There are many different ideas when it comes to the acceptance of this particular breakdown for young people. Some think that we should be saving at a much higher percentage because most college students generally don’t have expenses like family expenses or a mortgage. In my personal opinion, the more you can save and invest when you’re young the better.
When analyzing spending based on the 50-30-20 rule, you can plan to save the remaining money from the 50% and the 30% once your designated spending period is over. Many financially successful individuals believe when you are young that even “if you have money, live like you’re broke.” Always live within or below your means.
Another key point when thinking about personal finance and budgeting is you should always have an emergency fund. This fund should only be used in the case of a real emergency. Most advisors say that you should allocate enough cash to this account to cover 3-6 months of expenses. Since we are in college, many students do not make enough and do not work as many hours as non-students. It is nearly impossible for most students to be able to save such a large emergency fund. I recommend taking 5% to 15% of your paycheck and putting this into your emergency fund until you hit your set goal.
For a college student, a good emergency account should range from $500 to $1,500. If you can’t afford to save that amount, put away as much as you can afford and slowly add to it until you hit your desired goal. Make sure that you do not randomly withdraw from this account for things that do not classify as financial emergencies. Examples of emergencies might include: automobile repairs, medical emergencies, or property damage.
Two of the most important concepts in personal finance are the simplest to understand. Know where your money goes and exercise self-control. If you do not know where your money is going, you will not be able to implement the 50-30-20 framework. There are so many important reasons why you need to understand where your money is spent.
The average American person spends $348 a year on subscriptions they do not utilize. Make sure that you are constantly monitoring your account to see if there are subscriptions you are getting charged for that you may be able to live without and cancel them.
Developing self-control is mandatory for practicing good personal finance and budgeting. People can say they want to stick to a budget, but if you cannot resist temptation, you will not have success. It is critical to spend within or below your means around 95% of the time.
When combating overspending and a lack of saving, there are a few tactics that may help. People who overspend often may want to try using cash for daily transactions. For people who have trouble over spending, cash can really put it in perspective. Using cash currency can help people recognize how much they spend on specific items unlike when they swipe a credit or debit card.
For those who may struggle sticking to the savings plan, they should consider setting up automatic payments into a separate savings account. This structure ensures that their savings are designated into specific accounts conveniently.
College students may think they have many years in which to save money. The truth is, it’s never too early to start investing in your future. Set financial goals and stick to them. I guarantee that being intentional with your spending, saving and investing will be well worth your effort.
