Personal Finance Advice for College Students
College students take a lot of heat for being poor money managers. But I’m convinced that all it takes to sharpen their skills is a little knowledge. I’ve reached that conclusion after years of working with summer interns here at Kiplinger. Each year, we get a new crop of bright young college students who know almost nothing about personal finance. And let’s face it, reporting and writing about things such as mutual funds and 401(k) plans doesn’t sound very glamorous. But when I ask them how they enjoyed their summer, I’m invariably impressed by how much they’ve learned -- and taken to heart.
Emily Inverso, who’s starting her senior year at Kent State University, says the most valuable takeaway for her was that a Roth IRA is an option even for college students who work part-time (see Why You Need a Roth IRA). “A retirement account always seemed to be something that accompanied a full-time job. But this summer I learned that retirement investing is attainable for someone like me, as long as I have earned income,” says Emily. “It almost seems silly not to start investing now. After all, compound interest is a beautiful thing.”
Surprisingly, retirement was also top of mind for David Marten, of Cornell University. While researching stories, David discovered target-date funds, which, in his words, “are useful for people who don’t have the time and don’t want to make the effort to manage their portfolios by themselves -- myself included.” (See Investing in a Target-Date Fund.) Says David, “If I were to invest in a fund that matured when I was ready to retire, say in 2060, the assets in the fund would be heavily geared toward stocks, so I stand to get a decent return over such a long period.”
Neither David nor Emily has any qualms about investing in stocks -- noteworthy in light of studies showing that young people were particularly burned by the most recent bear market and are shying away from the stock market. But right now, Emily’s top priority is saving up her money to pay for a move to a “sizable city” after graduation.
Kaitlin Pitsker, who graduated from Syracuse University, is also watching her budget so that she can periodically pay an extra $50 or $100 toward her student loans. In fact, Kaitlin has created a spreadsheet in Excel to calculate an amortization schedule for her loans that shows how much an extra payment now will save her later on. Says Kaitlin, “That’s a great motivation to find extra money in my budget and not use it to splurge.”
Based on the experience of my Kip “focus group,” here’s my best advice for students going off to college this fall:
--Stay on top of your student loans so that you don’t get in over your head. Even if you don’t set up an amortization schedule, at least figure out how much it will cost you to repay the loans based on the starting salary you expect to make (see Avoid the Student Loan Debt Trap).
--Keep track of your money using pencil and paper or an online money-management tool so that you can cover your expenses without overdrawing your account (and have enough to finance a post-graduation move). Even though many banks have increased their fees, I still think debit cards are the best way for students to learn how to manage their money (see How to Teach Kids to Handle Credit Cards).
--Take a pass on credit cards. Studies consistently show that college kids struggle with credit card debt. One recent survey of undergraduate business students published in the International Journal of Business and Social Science found that 90% of student cardholders carried a balance from month to month, and fewer than 10% knew their card’s interest rate or what they would be charged if they made payments late or went over their limit. To avoid the debt trap, students should forgo cards at least until they’re ready to graduate and have acquired several years of experience and confidence managing their cash.
--Start saving now. Any money earned from a summer job or other work can be contributed to a Roth IRA. In 2012, the contribution limit is $5,000 or the amount of your earnings, whichever is less. And if kids need their money to cover college expenses, parents can kick in the equivalent cash. As David observes, “the earlier you start saving, the better off you’ll be.”
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