How can I manage my money so I can take control of my finances?
The key to successfully managing your money is having a clear idea of what you are making (your income) and what you are spending (your expenses). One way to get started is to take out a single blank sheet of paper. Draw a line down the middle. On the left side list your income sources. On the right side, list your expenses. Total up the two columns, and you will get an initial snapshot of how you are doing financially.
The goal is to make sure that your expenses do not exceed your income sources.
Why should I use a bank?
Using a bank will provide you a great way to keep your money safe and start building a credit history.
You will be able to deposit your paycheck at the bank for free and get monthly statements showing you how much money you have.
How do I decide which bank I should use?
When it comes to choosing a bank, remember that you have a LOT of choice, and banks want your business.
You should consider the options in your neighborhood, and choose the one that is most convenient and has the best benefits for you.
Some points to consider when selecting a bank:
What are the fees charged by the bank for having an account?
What is the interest rate the bank will pay you if you have an account with them?
Is there a minimum balance required to keep an account open?
Are there charges to use an ATM machine if you need to withdraw money from your account?
Is the bank open convenient hours that work for your schedule?
These, along with other questions are important to discuss with any bank you consider as a choice for your banking needs.
Meet with a banker to ensure you have covered necessary points which concern you and what you’re looking for.
What is a credit union?
A credit union is a financial institution like a bank, but is owned by its depositors.
This often leads to higher interest payouts on savings and lower interest rates on loans.
How does a checking account work?
Most banks offer college students free checking accounts.
This means you will not be charged an annual fee or be required to maintain a minimum amount of money in the account.
The bank will give you a checkbook, from which you can write checks.
A check is a piece of paper with your account information on it.
You write the name of the person or establishment you wish you purchase goods or services from, along with the amount.
You are then given the goods or services and your check is taken to your bank where your bank then takes the money from your account and gives it to the person or establishment presenting the check.
You must have enough money in your account to cover the amount written on the check for the bank to be able to pay out.
If not, the bank may charge you fees if the check is presented, and then returned to the person or establishment due to not having enough money in your account to cover the check. This is called non-sufficient funds (NSF).
You will also be given an ATM debit card that you can use to pay for items at many stores, and use at ATM machines to get cash out of your account.
You must also have money in your account to be able to use your ATM at the point of sale in an establishment.
Again, if you do not have enough money in your account, your card may be declined.
You will get a statement each month from your bank showing your banking activity; all of your deposits and withdrawals, including checks, point of sale purchases, and cash withdrawals.
What is a debit card?
When you open a checking account, your bank will give you an ATM debit card so that you can easily access your cash from ATM machines, as well as make purchases at stores instead of having to use cash or write a check.
When using your debit card to withdraw cash at an ATM machine, it is typically best to use ATMs owned by your bank so that you avoid needless fees (usually 1 to 3 dollars) you may be charged by using other bank machines each time you take out money.
Some banks do offer free withdrawals from other bank’s ATM machines.
Using your debit card to pay for items at stores, and other establishments can be a convenient option.
You must have money in your account to be able to use your debit card at the point of sale in an establishment.
If you do not have enough money in your account, your card may be declined and/or you may be charged additional fees.
It is important to understand the terms of agreement with your bank regarding your debit card.
How do check cashing services work?
A check cashing service will cash your checks for a fee. If you have a checking account with a bank, this is a service they provide for free.
What types of insurance should I have?
Having solid insurance can help you in many ways. It may seem frustrating – paying money for insurance that you may never use. But that is short-sighted.
If you are ever in an accident, get robbed, or get sick, you will be very happy that you have insurance!
The key types of insurance for a college student are: auto insurance, health insurance, renter’s or homeowner’s insurance, and life insurance.
Most insurance policies have what is called a deductible.
When you claim a loss, this is the amount that you will need to pay first, before your insurance benefit will kick in. Depending on the type of insurance, this can be an annual deductible or in the case of auto insurance, for each claim.
For example, imagine you have a car insurance policy with a $500 deductible. If you have a car accident, and there is $3,000 of damage, you would pay $500 and insurance would pay the remaining $2,500.
Make sense? The goal of having insurance is to protect yourself in case something bad happens.
Here is an overview of each insurance type:
If you own or drive a car, you need car insurance. This is a legal requirement. This is to protect you – in case you are hit by another driver – and to protect other drivers in case you cause an accident.
Health insurance is essential to protect yourself from unexpected health care costs in case you get sick or have an accident. You pay a monthly premium in exchange for the health insurance company covering a portion or all of the costs you may incur in the hospital or for prescription medicine.
Renter’s or Homeowner’s Insurance
Renter’s insurance is inexpensive. Pay a little money each month for it. If your apartment or house or room gets robbed, or – for example – there is a major storm, you will be covered for the amount of the loss that is above your deductible.
For example, your apartment gets robbed, and you lose a computer, stereo, and $300 in cash. Assuming the computer and stereo are worth a combined amount of $1,000, your total loss is $1,300. If you have a $300 deductible, insurance would pay you $1,000.
Young people may think life insurance is not needed. You feel youthful, healthy, and indestructible. But there is another way to look at it. When you are healthy, this is the ideal time to purchase life insurance.
If you are a single individual, having a policy that covers the costs of your funeral would lessen the loss on your family and relatives.
Life insurance becomes even more important if you get married, have a domestic partner and/or have children. The benefit of a life insurance policy can help your surviving spouse/partner fill the financial void of your loss of income.
What can I do now to prepare for my eventual retirement?
As a college student, planning for your retirement may be the farthest thing from your mind at this point.
Obviously, more immediate needs, such as going to school, getting good grades, paying for school, and finding a job are probably your focus right now.
While retirement may indeed be many years off into the future, it is a good idea to at least know the basics of saving for retirement now, so that you can put yourself in a good position to have financial stability and security when you do retire.
At this point in your life, there are four concepts that are important to be aware of and to understand.
The power of savings and compound interest
Any money you put aside in savings can grow over time through either interest (paid by the bank) or by investment gains (such as through an investment in a stock).
The interest you gain (also known by the term “accrue”) each year compounds over the gain you made the previous year.
Consider this example:
You put $2,000 aside in a retirement fund. You earn 8% interest in Year 1. That is a gain of $160.
In Year 2, after the gain in Year 1, you start with $2,160. You add another $2,000 to your fund. You earn 8% in Year 2. You finish the year with $4,493.
After 10 years, assuming you add $2,000 a year to your fund and gain 8% a year, you would have $31,291.
The power of starting early
Assume, in the example we just discussed, that the first time you put money aside was when you were 21. Assume you put $2,000 aside every year for 10 years, from age 21 to 31. And then you stopped adding money.
If your fund continued to gain 8% a year for the next 35 years, you would have $462,648 when you are 65.
Starting early will enable you to take advantage of time.
By contrast, someone who does not start saving until age 31, even if he/she puts $2,000 aside each year for 35 years from age 31 to 65, would only amass $372,204 in savings.
So starting early can give you a big advantage in saving.
But remember this:
While it is true that starting early will be a big help, it is also true that it is never too late to start. The sooner you start, the better your financial health will be in retirement.
The power of retirement options like IRAs, 401Ks, etc.
Your employer may give you an option to participate in retirement programs such as an Individual Retirement Account, known as an IRA, or perhaps a 401K plan.
There are two advantages to these programs.
First, they enable you to dedicate a portion of your salary, before it gets taxed, into your retirement account. This money will eventually be taxed when you take it out at retirement. But in the meantime, it will grow from a greater starting point.
Second, some employers will match a portion or all of your contribution into a retirement plan. This means that if you put $2,000 aside for retirement, your employer may put up to an additional $2,000 into your account as well. This is free money!
The potential support from Social Security and pensions
Typically, a portion of the taxes you pay on your wages each pay period is used to support the Social Security fund.
As you pay into this program, you will be eligible to receive retirement benefits when you retire.
The funds you will receive in retirement will likely cover only a portion of the income you need in retirement.
Some employers may offer a pension plan in which you will receive a portion of your salary every year in retirement.
Take note of how many years of service you need in order to qualify.
A pension may become another source of income in your retirement years.
While retirement may not be on your radar today, it is worth thinking about it now so that you can take advantage of these concepts. You will be glad you did when you do retire.