For many young people, college is their first money management experience. However, many students are not adequately prepared to handle their own finances. One of the leading reasons that students drop out of college is because of finances – often due to poor personal money management.
Parents recognize the need for their students to have basic personal finance knowledge, but many don’t know how to teach their children good money management skills. Parents should recognize that learning good personal finance habits doesn’t have to be difficult or complicated.
By practicing basic money management techniques, college students can feel confident about their ability to manage their finances. Following are the most common money management mistakes the UNL Student Money Management Center, a financial education program, sees students make. There are easy solutions to help students avoid making these common money management mistakes.
1. Not Knowing Where Their Money is Going
Want to know a millionaire’s secret? Live within your means. Even Donald Trump has to control his spending. He has to make financial choices based on the money he has available, like only buying only one private island instead of two! Overspending is a problem everyone faces at one time or another – especially college freshman. We have talked to countless freshmen that drain their savings accounts within the first month of college and then have to take 1, 2 or 3 part-time jobs just to pay for basic expenses.
The first thing every college student should do to gain control over their financial lives is create a spending plan. Having a spending plan will allow students to see where their money is going and where they can cut back their spending. We recommend that students try http://www.mint.com – which is free, easy-to-use budgeting software that will automatically create a basic spending plan that the student can then personalize.
Basically, when creating a spending plan, you compare your income to your expenses. Making your income and expenses match OR having more income than your expenses is the goal. This means your financial life is in balance and you are living within your means. A negative number means you are spending more than you are earning and need to adjust your spending habits.
2. Not Having a Plan for Their Money
Students often have no plan for how to use their money. In this case, they would benefit from setting financial goals. There are things each of us wants to get out of life, and we have to plan for how we will pay for them. For example, a common financial goal for UNL students is to go on a study abroad trip. They need to write down this goal, as opposed to just thinking about what they want to do with their money in the future. Writing goals down has been proven to lead to greater success in actually achieving goals. Writing down a goal makes it more permanent and you are more apt to remember and reach it.
Another goal might be to have an emergency fund to use for unexpected expenses, such as parking tickets and car repairs. It’s easy to let one unexpected incident make your financial life spin out of control. Another common goal is to graduate with as little debt as possible. To save money, students should remember to pay themselves first. They should try to put aside 5-10% of their monthly net income for savings.
Savings goals, financial goals, and debt repayment obligations should be included in their spending plans.
3. Not Determining Wants vs. Needs
Sounds pretty basic, but many college students try to live outside their means because they haven’t thought about categorizing their expenses – determining what they really need versus what they want. Following is a good example of choosing between wants and needs: You probably understand food is a need and coffee is a want. But some mornings, a Starbucks latte is sure to feel like a need. However, there are almost always inexpensive alternatives for your “wants.” In this situation, skip the trip to the coffee store and brew your own coffee at home for a lot less. Determining wants versus needs will help college students avoid impulse purchases and overspending.
4. Succumbing to Peer Pressure
Peer pressure is a very powerful phenomenon on a college campus. Students need to understand it’s okay to say “no”. If their friends want to go out to eat, see a movie, or go on a trip, but they know they do not have enough money in their entertainment budget, they should know they don’t need to give into peer pressure. This is where financial goals are important – students need to concentrate on what they really want out of life in order to help them avoid overspending. Plus, if they make good financial choices, they could help their friends make better financial choices.
5. Abusing Credit & Ruining Their Credit Score
Many college students mismanage credit cards and find themselves caught in a cycle of debt. To prevent making mistakes with credit cards, students that are considering using credit cards should first determine if credit really is a good option for them. The students that can handle credit wisely understand that they need to set limits for themselves on what they use credit cards for, know they have the self-discipline to not use credit to purchase what they can’t afford, and know they will be able to pay the credit balance in full each month to avoid wasting money on interest. Also, people under 21 cannot get a credit card unless they have a co-signer or are able to prove that they will be able to pay their bills with only their present income. Before parents co-sign for a credit card, they should make sure that their student understands how to use credit wisely.
Students should understand that their credit management habits will affect their credit score - which will affect their future financial life. For example, they should know that if they create a low credit score, they will pay more for mortgages, auto loans, etc., may be prevented from getting an apartment, and, in some cases, even getting a job. Many employers now check credit scores before extending job offers, as a credit score is an indicator of responsibility – if you can handle your finances correctly, you most likely are a responsible person.
Students who wish to build a good credit score should know to: pay their bills on time - the most important thing you can do to establish your score; only open accounts you need - generally 1 or 2 cards are enough for college students; maintain long account histories - the longer you have accounts open and the longer you manage the account responsibly, the more your score will rise; and keep debt levels low - keep balances under 30% of the total credit limit.
When students are choosing a credit card, they should read all application materials carefully – especially the fine print to know what fees they may be charged. Also, they should know that the introductory interest rate often will not last. They need to know what their interest rate will jump to after the introductory period.
6. Abusing Student Loans
Many students are at a loss when they try to figure out how they will pay back their student loans. The most important thing students should know about student loans is they should only borrow enough to pay for necessities. Often students use their student loan refund (if students borrow more than they have to pay in, they will receive a the difference in the form of a refund check) to purchase their “wants” – big screen TVs, video games, clothing, vacations, etc. They should strive to graduate with as little debt as possible. Once they graduate, they want to put their money towards achieving their financial goals, such as purchasing a house. They don’t want all their money to go towards debt payments.
Also, students should understand that their refund check has to last throughout the semester. They should strive to use their refund to pay for only necessary items. If they have money left over at the end of the semester, they can use that money for the next semester, which will cut down on the amount of money they will need to borrow. {Note: Students may find it helpful to stop by the Money Management Center to create an initial budget earlier in the semester so they can see what funds they actually have available. This is a wonderful opportunity to learn how to manage their money and expenses.}
One of the greatest satisfactions in life is having a sense of control over your personal finances. When it comes to money, students should always remain positive – practicing good money management habits can be challenging, but with a little practice and patience, it is possible. Practicing good personal finance habits is an empowering experience, and helps students gain confidence in themselves and their ability to be financially successful.
The UNL Student Money Management Center is a joint effort between ASUN, Student Affairs, and the department of Child, Youth & Family Studies in the College of Education and Human Sciences. The mission of the program is to encourage students to take responsibility for their financial futures by creating and upholding a culture of financial empowerment among the student body through financial education.
More details at: http://go.unl.edu/3jk