When I got my first paycheck in college, I spent the whole thing on fashion hauls and mukbangs. It wasn’t until I discovered personal finance that everything changed. It even convinced me to change my major to finance. While this article might not inspire you to switch majors, it will be your canon event on learning financial literacy and getting your life together.
Financial literacy is essential in today’s age, especially in our generation, because we are still young enough to learn about personal finance before we make a mess of our future. Not only will I be sharing ways you can improve your financial knowledge, but I will also be teaching you how to adult in the real world. I would like to advise you all that while I may be a finance major, I’m not a financial advisor. Please consult with a professional for any financial decisions, or do your research.
Create a budget you can actually stick to
Budgeting keeps track of your income and expenses, and helps you control where your money is going. Budgeting is crucial to having financial stability and to being able to live the life you dream of. One important thing about budgeting is to learn how to prioritize your needs, wants and savings. My favorite way to track my income and expenses is to follow the 50/30/20 rule. If you would like to use a template, click the link here in the online version of our article. This budget rule is divided into three parts: 50% is for necessities, 30% for wants and 20% for savings.
Necessities cover the expenses that you must pay to maintain your lifestyle. This includes housing, groceries, transportation, tuition and utilities. Wants are expenses that are non-essential and are not needed to survive. Wants fall under the category of making your life enjoyable. This includes take-out foods (in some cases), streaming services, hobbies and entertainment. Yes, daily trips to Scotty’s are considered to be a “want” (guilty).
Savings is money you put aside in case of an emergency or to contribute towards a goal. It can be deposited into your savings or retirement account. Whether you’re saving for a vacation or want to splurge on a big item purchase, savings is money set aside for the future.
You can adjust this budget based on your needs because this budget method is not a one-size-fits-all solution. But this method will help you to organize your finances without restricting you from having fun. So start tracking your finances!
Pay off your debt
The most popular way to pay off your debt is the debt avalanche method. This method focuses on paying off the loan with the highest interest rate first. Afterwards, you move on down to the next highest interest rate until you completely pay off all your loans. While following this method, it is advisable to pay the minimum amount that is due for each month on every loan. . The purpose of following this method is to pay less interest over time, meaning you don’t give your hard-earned money to the bank.
Loans can consist of credit card debt, student loans, car payments, mortgages, etc. Some mistakes that can happen to the average person is paying their credit cards by the minimum payment rather than paying the entire statement balance. Credit cards typically have higher interest rates between 21% to 30%. So, when you do not pay your statement balance in full, the interest compounds. In other words, you not only need to pay your balance when you fail to pay in full, but you also need to pay the bank for the interest that has been accumulated. By paying off your debt quicker and in full, you can save money and redirect that money back towards you. By using the spreadsheet I’ve created, you can track all of your loans to make sure you are paying the right amount.
Build that emergency fund
It is important to build an emergency fund for yourself due to the fact that at any moment, something bad can happen. Whether your car broke down or you got hit with an unexpected tuition fee, you can rely on that emergency fund that you built. Emergency funds should be at least three to six months of your living expenses. The best way to keep your emergency fund safe is by keeping it in a high-yield savings account. A high-yield savings account is a savings account where you can deposit money and accumulate interest over time.
For example, if you deposit $10,000 inside the HYSA and leave it untouched for one year with a four percent annual interest rate, you will earn $400 of interest by the end of the year. If you were to do the same with a traditional savings account with a 0.01 percent annual interest rate, you would only earn $1一let that sink in. I use Marcus by Goldman Sachs to build my emergency fund while having cash as well in case I need hard money. Speak with your friends and family about whether they have an account so that you can use their referral code.
Start investing
Many of you may be intimidated by the word investing. Yes, there are intimidatingly many ways one can invest. Whether it’s investing in the stock market or buying real estate, investing is a great way for you to grow your money. If you are a beginner in investing, you should all start with opening a Roth IRA account. A Roth IRA is an individual retirement account for which you contribute money you have already paid taxes on. Once you retire and withdraw the money, you won’t get your money taxed by the government, meaning your earnings will be tax-free.
It is important to start as soon as possible to grow your account and earn money from capital gains. Even putting in $5 a day can make the biggest difference when it comes to investing in this account. Some easy accounts to open are with Fidelity or Vanguard. Both Fidelity and Vanguard are beginner-friendly platforms that offer Roth IRAs with no account-opening fees and no minimum contribution requirements. Because you are in your early 20s, the best way to diversify your account is to invest in 70 percent domestic index funds, 20 percent foreign index funds and 10 percent bonds. By investing in domestic index funds, foreign index funds and bonds, you are balancing and diversifying your investments. For example, if the domestic market crashes, you have steady foreign investments that are still thriving and vice versa.
Index funds are like buying a bundle pack of stocks and are less risky compared to buying one stock (a share of a company). Index funds are less risky because you are investing in many companies all at once. If one company is performing poorly, the entire index fund won’t plummet. Bonds are loans you give to a company or the government in exchange for regular interest payments. They are known to be steady and low risk, which makes them a reliable investment. Some beginner-friendly index funds I invest in using Fidelity are:
Domestic: FXAIX, FSKAX, FSPGX
Foreign: FSPSX, FPADX
Bond:FTBFX
These letters are ticker symbols that represent the name of the index fund you are investing in. For example, you can easily search “FSPSX” instead of typing the full name, “Fidelity International Index Fund.” This makes it easier for investors to find the index fund on Fidelity or Vanguard.
Get a drivers license with the REAL ID
Though this isn’t a strictly financial tip, it is an important step in adulthood to get your drivers license. Many of you are either commuting or living on campus for college life. For those who do not have a driver’s license, I will remind you that you should get one. Having a driver’s license will not only help you move around, but it will also bring you opportunities for jobs that require a driver’s license. I advise you to all get the REAL ID to be able to travel domestically and enter federal facilities. You do not want to rely on anyone for a ride to the grocery store.
The entire purpose of this article is to help you get a foot in the door once you leave college life and have the right tools to survive the real world. Adulting can be difficult and overwhelming, but your future self will thank you. I challenge you all to check off the list in the correct order and commit to completing everything.
I recommend making a copy of the spreadsheet and starting to track down all your finances. I encourage you all to share this article with someone you care about who may need help with their finances. There is no rush to complete it all in one sitting. You do not need to be perfect一just start.
If you’re curious for more, in next week’s issue, I will be discussing the importance of opening a credit card and which ones are recommended for university students.
