Between books, booze, tuition, and take-out, student finances can be tough. Here are three simple finance tips for students to help you make the most of the best years of your life.
1. Knowledge is power
Scientia est potentia. But you don't need Latin to know that knowledge is power, and nowhere else is that more true than finance. Knowing where your dollars are and what you're doing with them is the first step to financial literacy.
Managing your money might seem daunting, but there are a dozen different ways to start tracking. For the hands-off approach, take a few minutes each month to scan your credit card statements and bank transactions. Does anything strike you as strange? Does Starbucks (NASDAQ:SBUX) show up on every day that ends in "Y"? You might want to think about skipping the soy latte every once in a while.
For the hands-on approach to budgeting, things have never been easier. Banks like Bank of America Corp (NYSE:BAC) and Wells Fargo & Co (NYSE:WFC) will break down your expenses into different areas, while apps like Mint help you review spending across all your accounts.
Once you know how you're using your money, you've armed yourself with the knowledge you need to make simple and strategic shifts in spending.
Another simple finance tip for students is to set financial goals. It's the easiest way to benchmark your success, and it can be a surprisingly straightforward process. The trick to making sure #youdoyou for personal finance is to focus on percentages, not dollar amounts.
Don't set a goal of saving $100 a month -- that might be a stretch for some, while others can save much more. Instead, consider setting aside 10% of your income. That way you can stick to your goal through thick and thin, whether you make $10, $1,000, or $10,000 in a month. Making an effective plan is important, but it has to be a reasonable plan you can stick to.
Meanwhile, saving can only happen if you cut spending. Consider the relative importance of each spending habit you have and make decisions accordingly. Let's say you currently spend $100 a month on takeout. Cutting that to $70 means preparing lunch three more times a month, but that extra $30 can mean a weekend trip, some jeans, or even (gasp!) paying off a portion of your college debt. So commit to saving money and have a plan for how you will use those savings.
3. Save early and save often
It might seem silly to save when you're making next to nothing. Why not wait until you've snagged a real job with a steady salary? Two words: compound interest.
When you save a single dollar, you can reinvest the interest you earn to build your bucks off each other. And as it turns out, saving early and often can have a major impact on your eventual finances. For example, consider the following student:
- At age 20, she starts saving $100 every month.
- Every year afterward, she ups her saving by 10%.
- Every dollar she saves earns 4% interest per year.
- She reinvests all her earned interest.
In the chart below, this student's savings are represented by the red line. Meanwhile, the blue line represents a fellow student who does everything the same except that she doesn't start saving until she's 25.
By the time each saver hits 40, the one who started earlier is already ahead by more than $100,000, simply because she saved $100 per month as a student. Now, some students can't save a single cent -- and that's OK. The exact same logic applies to paying off student debt, credit cards bills, and anything else dragging your accounts in the dirt. Acting early and often is your key to long-term financial success.