FINANCIAL FRESHMAN #005
TL;DR → You may not make that much money in college, but it’s a crucial time to develop strong financial habits. Use this period to practice financial planning, track your expenses, build your credit, enhance your financial literacy, and set meaningful financial goals. Establishing these habits now will help you start your career on good financial footing.
College Financial Habits
It’s common to consider college as the best four (or five) years of your life. College is your time to establish independence, learn new skills, and become someone who is ready to enter the workforce after graduation. One thing that you may not consider is how important this transition is to your finances. In fact, the habits that you form when you start your first full-time job will quite literally set the stage for your financial future.
While you may not have much (or any) income during your time as a student, college is still a great time to establish good financial habits that will be critically important later in life. Below we’ve outlined five college financial habits that every student should adopt, presented in no particular order.
Habit #1: Prepare for Life After College
It’s essential to have a realistic understanding of what income you should expect when you finish college. If this feels like a challenging task, our recent post on this topic may help. Additionally, you should be aware of any debt you’ve already incurred, as well as debts that you expect to take on early in your career. This may include, but certainly isn’t limited to, student loans, credit card debt, personal loans, or financed vehicles.
Once you have a clear estimation of your future income and debt, compare these numbers to each other. This comparison will help you understand your financial standing and guide your future budget and financial planning efforts. It will also draw attention to how much of your future income is already allocated!
While you’re still in college, this practice may be more about the behavior itself and less about the specific numbers. This behavior ensures that financial planning becomes second nature, which will equip you to proactively navigate future changes to your income or the incurrence of new debts.
Habit #2: Track your Spending
Without opening your banking app right now, do you know how much money is in your checking account?
Unless you have a part-time job or income from some other source, creating and maintaining a formal budget may not make sense while you’re still in school. You can, however, use your estimated future income and expenses to better understand what an average month will feel like once you start working full-time.
Regardless of the amount of money you have coming in, you can easily begin tracking your spending while you’re still a student. Knowing where your money goes is foundational to so many other skills in the world of personal finance.
“If you don’t tell your money where to go, you’re going to wonder where it went.” – Dave Ramsey
Habit #3: Establish Credit Responsibility
Your adulthood will be filled with instances where you will need to use credit. When you apply for a car loan, take out a mortgage to buy your first home, or open a new credit card, the lender will inquire into your credit history to understand your creditworthiness as a consumer. Wouldn’t you like to see that credit report before they do?
While you’re still in college, you can begin to take responsibility for your own credit. The Federal Trade Commission has published consumer advice on this exact topic, which explains in detail how to annually review your credit report from each of the three credit bureaus (Equifax, Experian, and TransUnion). Note that if you have never had anything reported to a credit bureau, you may not have a credit report at all yet. You’ll still thank yourself later for becoming familiar with the process!
You can also begin building credit by opening a credit card if you have not already, but only if you are able to pay off the balance in full every month. This positive payment history will reflect in your credit score.
Habit #4: Grow Financial Literacy
Does your college or university offer a class in personal finance? If so, consider enrolling to gain a solid foundation in managing your money. If formal classes aren’t available, use your time in college to seek out resources on your own. Research topics that are unfamiliar to you, and find articles and books that will help fill gaps in your current financial knowledge.
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Habit #5: Set Financial Goals
If you have student loan debt, when do you want it to be completely paid off? Do you dream of going on a nice vacation after you graduate without having to rely on credit? Will you need to purchase a vehicle before you can start working full-time?
Setting clear financial goals can help you achieve these milestones. Start with smaller, manageable goals while you’re still in college. For example, aim to save a specific amount each month from your part-time job, or limit restaurant spending by preparing most of your meals at home. You could also aspire to begin an emergency fund to cover unexpected expenses in the future.
Later in life, these goal-setting skills will be invaluable as you work towards even bigger objectives, such as paying off your mortgage early or securing an early retirement. By establishing and sticking to financial goals now, you’ll develop the behaviors necessary to ensure your actions and your goals are always in alignment.
Final Thoughts
The sooner you begin demonstrating these positive financial habits, the better off you will be. Remember that it’s not just about the income you will earn, and that the world is filled with high-earners in poor financial positions.
The habits you form regarding your money will play a crucial role in achieving financial wellness. By starting these practices early, you’ll develop the discipline and foresight needed to transition successfully into your full-time income.
