August 4, 2011
Money matters: Setting a budget, financial planning can help college students now and in future
A college student's idea of investing may lean more toward purchasing season basketball tickets than an individual retirement account, but financial experts say taking a more focused look at their financial situation early can help students budget for today and the future.
Budgeting should begin before a student even sets foot on campus, said Jodi Kaus, program director for Powercat Financial Counseling at Kansas State University. Students may have extra funding from high school graduation gifts, savings bonds or part-time job income, and it's important to put that money to good use.
"Students should keep an emergency savings cushion for unexpected contingencies," Kaus said. "They should articulate their own specific financial goals to prioritize how they want to make use of these extra resources. Using them for a portion of college costs could help reduce the amount of necessary loans and interest charges."
Once students get to school, Kaus said they need to be in tune with their money. Making a detailed list of all spending items can reduce the chance of running into an unexpected expense.
"Laundry and haircuts are often overlooked, but these costs can add up over time," Kaus said. "Eating out tends to be the biggest budget breaker for most students. It becomes a social event, but $15 here and there starts to eat into a budget very quickly."
As students transition through their college career, Kaus said other budgetary items will need to be considered and planned for ahead of time, like the cost of living off campus or taking a study abroad experience.
Kaus cautioned students against supplementing their budget with a credit card or getting one without serious consideration, although recent laws have made it difficult for individuals younger than 21 to get a credit card without a co-signer, usually a parent.
Eric Higgins, head of the finance department at K-State, said the new credit card laws allow parents of young credit card holders to be more in tune with their student's spending habits. This also can help alleviate mismanagement of credit at an early age.
"It's a common problem, students not being able to manage credit cards," Higgins said. "You don't want to get into debt and then be forced to start from behind."
Higgins said other credit card tips include:
* Don't open too many lines of credit -- holding more cards than needed -- because it can hurt your credit score.
* Call to cancel unwanted cards immediately -- don't simply cut them up and throw them away.
* Pay credit bills off each month in order to avoid interest charges, and don't use them as a substitute for cash.
Instead of credit cards, Kaus said she urges students to have an ongoing conversation with their parents about their financial support and expectations. Parents may be willing to pay for some expense items, but eventually the student will most likely be fully responsible. Knowing these amounts is important, she said.
Higgins added that other means of income, including part-time jobs, starting a small business or investing in real estate or the stock market, can then be used toward some kind of savings plan that lays the first steps to a secure financial future, such as starting an individual retirement account.
"I encourage students to start thinking about investing and saving," he said. "Save early and save often. When it comes to building wealth, the earlier the better."
To make the road to financial success at a young age a little smoother, it helps to avoid some common pitfalls. Kaus said the easy part of making a budget it putting the numbers on a piece of paper. "The hardest part is changing your behavior toward managing your money," she said. "Students should begin by establishing small habits that set them up for long-term success."
Kaus' tips for avoiding budgeting mistakes include:
* Using a pocket-sized debit card register to record transactions.
* Paying yourself first by automatically directing a percentage of each paycheck to savings instead of checking.
* Setting aside 10-20 minutes each week to review a spending plan and monitor progress.
* Remembering to take into account any withholdings from paychecks.
* Always paying bills on time -- possibly setting up automatic payments -- because timely bill payment is the largest factor in determining credit worthiness.
* Monitoring credit usage. It is recommended that credit card holders use no more than 25-30 percent of their credit limit at all times.
* Avoid short-term solutions, like payday loans intended to cover a borrower's expenses until the next payday. Higgins agreed, adding that there is never an instance that a payday loan would be helpful to a student. There are laws on how much these businesses can charge, but few regulations on their fees. "You will pay way too much in interest charges -- the annual percentage rate is astronomical," he said. "When you factor in fees, you could be paying as much as 500 percent. It's a trap -- students spend their loan check, and need money to pay their tuition. Payday loan places know these students get a check each semester, and if you direct deposit it with them, you'll stay a check behind and never see the money. It's a pit."
* Check other options offered by your school. At K-State and other universities, emergency student loans are available. K-State also offers Powercat Financial Counseling, a free service for students that provides peer financial counselors trained in personal finance, planning or business finance. Powercat Financial Counseling is in the office of student activities on the ground floor of the K-State Student Union. More information is available online at http://www.k-state.edu/pfc or by calling 785-532-2889.