Transitioning from secondary school to college, university, or a job is an exciting time but it can also be scary. If you’re like most young people, it’s the first time you’ve spread your financial wings managing money separate from your family. Decisions you make early in life can have a big impact down the road. So it’s important to invest in Finance 101 to ensure a secure future.
Let’s take a look at some financial planning tips that can increase your fiscal literacy and launch you on the right trajectory for success.
Table of contents
- Live at home if possible
- Avoid accumulating student debt
- If you do borrow, plan the payback
- Look beyond tomorrow
- What is financial planning?
- What is budgeting?
- Pay Off Debt – Especially High-interest debt
- Create a credit history
- Improve your credit score
- Create an emergency fund
- Buy insurance when needed
- Be prepared for adult life
- Start to invest early
- Don’t be convinced to lend money
Live at home if possible
In the era of Coronavirus, living at home may not be optional versus heading to university dorms. While that might not sound like the college experience you pictured, there are big financial advantages. An article in Maclean’s Magazine in the spring of 2018 said that the average cost per year for a student living at home while attending university is $9,300. That compares to the cost for a student living away from home of more than double that total at $20,000 annually.
Clearly, if you can live at home virtually rent-free and meal-plan free while attending college or university, the savings can be significant.
Avoid accumulating student debt
Whether you live at home or on/off-campus, post-secondary education is expensive in terms of tuition fees, books, computers, lab supplies and other necessities. Contributions from parents and money you’ve earned from summer jobs or part-time employment can help offset the expense. But chances are you’re going to need to borrow at some point to make ends meet. For those with greater need, government grants that don’t require being paid back can be an option.
Even if the borrowed money is available and easy to access as a student, think about what you need to live on and keep the debt level as low as possible.
Over a typical three to four-year bachelor’s degree program, costs can accumulate quickly and so can debt. That will leave you with a financial monkey on your back immediately after graduation.
If you do borrow, plan the payback
The focus right now may be to access as much money as possible to ensure you can stay in school. But you need to consider how you will pay those funds back. It’s also important to look at how long it could take to pay off debt. The biggest financial planning tip for young adults is to ensure you have a plan for repaying any debt you take on. A good formula is to target keeping all debt after graduation to 35% or less of your income.
Look beyond tomorrow
When you’re busy stepping up to the challenge of college or university-level courses, it’s hard to look beyond when the next assignment is due. But it is important to think longer-term about your end goal for going to school. You’re in school to broaden your knowledge and expertise, but also to be well-positioned for a career doing something you enjoy.
Keeping an eye on spending now so you can have the best start after graduation is a smart move.
What is financial planning?
So how do you create that smart opportunity for yourself? Financial planning sounds like something only older people do. The best time to start financial planning is when you’re young. It’s exciting to think that you can take responsibility for your financial future. Financial planning for students means laying out a road-map to where you want to go and put in place a plan to get you there. As Wayne Gretzky famously said, “Skate to where the puck is going, not where it has been”.
Set clearly defined financial goals
The first step is to set some goals you are willing to work towards that can benefit your personal finances. Try creating a couple of short-term, medium-term, and long-term goals so that things are achievable. Examples might be:
Short-term goal: Spend only what’s in my account for this month and put nothing on credit.
Medium-term goal: Save $100 by Christmas so I have some money for family gifts.
Long-term goal: Keep student debt below $5,000 overall so I can visualize paying that off when working.
Your goals will depend on your situation and should suit where you are now and where you’re going.
What is budgeting?
There are basically only a couple of ways of maximizing your finances. One is to earn more which can be challenging as a student or a newly launched professional. The other is to manage the money you have so you don’t create debt. Budgeting is the process that helps you manage your money and keep on track for student life or for life as a young professional.
Create a budget for yourself
To create your personal budget, start by listing your fixed monthly expenses. That includes things that you can’t avoid paying like rent, utilities, cell bills, transportation costs to school, minimum grocery spend, etc. Then note the things that are optional commitments like Netflix subscriptions, gym memberships, etc. Finally, tally the things that you spend variably on. That could be extras at the grocery store, eating out, entertainment, alcohol, etc.
Now that you have compiled all your typical monthly spending, take a look at your available funds. Do you get a monthly deposit from home to help with school? Are you working part-time with regular pay? Do you regularly draw down money from a savings account? Total what you have to work with monthly from all sources.
Now it’s time to compare what funds you have available with monthly costs for all the expenses you just finished tracking. That will give you a picture of whether you are meeting your bills monthly, overspending your budget, or able to meet expenses and even save a little.
If you want some help automating the budget process there are on-line apps that you can use to establish and track your budget.
How to track spending
Sometimes when you are immersed in the demands of school and social fun it’s hard to pay attention to day-to-day spending. If you have a credit card, reviewing your statements can be a helpful start to analyze where your money has been going. Regardless of cash or credit payments, get into the habit of saving receipts whether it’s at the student café or at your company’s cafeteria. There are plenty of tools out there to help track what you spend for a month to ensure you really know where your money is going.
Understand needs versus wants
If you’re studying biology and there are lab requirements, you need to spend money on materials. That’s a need. If you want to go to spin classes that cost $50 a session even though you have a free gym at the college, that’s a want. Ask yourself what you really need versus something that’s a nice-to-have. The want vs. need thought process can help you make good decisions about how to spend your money.
Stick to your budget – live within your means
Staying on budget relies on making good spending and saving decisions. We can all rationalize spending when we want something and it takes self-discipline to avoid making excuses. One pitfall is thinking, “It’s only $25 a month to pay for that new Bluetooth speaker I want”. With enough of those $25 per month commitments, you’ll be way over budget in no time. Budgeting for student life and sticking to your financial action plan will ensure success.
Avoid impulse buying
That’s why avoiding impulse buying is important because sometimes it’s hard to beat down that little voice that says, “It’s only xxx dollars”. One way to escape impulse spending is to never buy something online or in-person on the day that you see something you want. Among the best financial planning tips is to wait at least a day and think about whether your purchase meets a need or want. And will your life be better because you bought it? Many times the answer will be no. Your life will not be better and in fact, spending will cause stress.
Manage or cut expenses
It may feel like there is nothing you can do to cut expenses. Well, here’s how to save money as a student without working. It’s all about making small changes. Instead of buying new clothes, take a careful look at what’s already in your closet. A great tip is to repurpose some items season-to-season. Do you have clothes or accessories you don’t need? How about arranging a swap with a small group of friends?
Watch your entertainment spend, especially eating and drinking away from home. That includes making coffee at home instead of paying hefty coffee shop prices. Never go grocery shopping when you’re hungry, and stick to your list! How to save as a student or a young professional is all about small but effective changes. Smart moves can keep more money in your pocket by the end of each month.
Automate bill payments
For the fixed costs in your budget like rent, utilities, and cell bills, the best idea is to have those set up for automatic payment from your chequing account. No more fearing the landlord coming by when you are three days late with the rent money and spent it all on binge-watching Netflix and eating pizza. Note when your payments are coming out. That way you’ll be sure to have sufficient funds in your account to make those automated payments a priority.
Manage the use of utilities
How many times when you were living at home did your Dad threaten to turn off the water heater because you were having epic-length showers? Now you hear his voice in your head as your roommates fail to turn off lights, turn the heat down, or limit showers to a reasonable time. For utilities that you can control, simple changes save money. Turn the temperature lower in winter and hotter in summer to avoid heating/cooling costs. Use major appliances during off-peak times. Set the water heater to a couple of degrees cooler. Those steps can all contribute to lowering utility bills.
Look for student discounts
What better advantage can there be than enjoying student discounts? Many retail outlets, telecom companies, gyms, and theatres honour student discounts. That can make a big difference over time. If discounts aren’t advertised, it never hurts to ask if there are special rates for students. That can apply to everything from local transportation to museum entry fees, to travel.
Get a student-friendly credit card
The worst possible scenario is being in university and racking up a boat-load of credit card debt so that’s not advisable. But what is valuable is holding a student-friendly, low-rate card that can establish your credit identity and build a positive credit score. To do that you have to make minimum payments on time and safeguard your financial future by paying off the balance every month.
Cook for yourself – curb eating out expenses
Where is your Mom when you need her? Why does her broccoli chicken casserole taste so much better than yours? It probably comes down to her recipe and years of experience. But you can get there too because the more you cook for yourself, the better the results.
And how to save money on food? You’ll be surprised how much you can save by avoiding the temptations of frequent food delivery services and trips to fast food outlets. Cooking for yourself can also mean better nutrition and less impact on the environment.
Recycle and Reuse
Speaking of the environment, reusing items that you already have and diligently recycling can help reduce our collective carbon footprint. It also can’t hurt your budget to use ‘stuff’ that you or your parents already have rather than buying new.
Whether you are a student or a young professional, shopping smart can save you money. Many retail outlets will price-match if you are buying something that can be purchased elsewhere cheaper. Don’t be reluctant to use coupons, on-line credits, and points to lower your bills. Be sure to comparison shop for the best deals on consumer items.
Shop at Discount Stores
When you’re making a major purchase like a new computer or cell phone, you want to deal with a retailer with credentials for quality. But for many smaller household items and everyday clothing, discount stores can be fun places to explore and can save a lot of money. Why pay $7.00 for a greeting card when you can pay $1.25 for a birthday card for Mom at Giant Tiger? Discount stores often buy in bulk. Watch for special deals on items like coffee, cereals, snacks, and linens to name just a few.
Avoid brand names – buy generic
When you have invented the next big social media platform, feel free to buy only brand name clothing and high-end décor items. But as a student or a young professional in the workforce, it’s time to be open-minded to quality clothing and other consumer items that are not high-end branded. Get ideas from Instagram and other sites and magazines. Then create a low-cost version of your favorite things.
Do stuff that’s free
Especially during the Coronavirus pandemic, people have become creative in how to enjoy life. Intricate puzzles, paint-by-number, board games, and online cooking classes became popular. Many of us now value running and walking outdoors more than paid activities like going to the movies or shopping. Lots of activities are free and can be satisfying so it’s time to try new, no-cost things.
Develop Income Sources
If you have the option of creating another source of income whether at school or as a young professional that’s a bonus! Maybe you can get a job as a teaching assistant or researcher working with a professor which can help you save money as a student.
Perhaps you can sell your artwork that you pursue outside as a hobby. Maybe you’re a good writer and could start a blog or a community publication. Anything you can do to create additional income will put you in a better position going forward.
Pay Off Debt – Especially High-interest debt
For those who have finished post-secondary education and have started a job, among the top financial planning tips is to tackle any debt remaining from school days. Even though you budgeted and lived within your means you may have had to borrow some money to pay tuition and buy needed supplies. Some of this debt may be in the form of student loans at a reasonable rate. Other debt may be on consumer credit cards at high-interest rates.
To make the best progress, any funds you can allocate to paying off debt should be applied to the highest interest loan first. Paying down debt will only happen if you make more than minimum payments. That way you’re not just paying interest but also paying off the principal. And the higher the interest rate the more you are paying for the privilege of having the loaned money. So attack the high-interest commitments first.
Create a credit history
If, however, you’ve been fortunate enough not to have needed to borrow during university, you have a different challenge. You need to start using credit in order to establish a good rating with lending institutions. Take out a low-limit credit card and use it to pay for some of your monthly needs. Then be sure to pay off the balance at the end of every month. That way, you establish credit history but don’t incur any interest payments or create debt.
Improve your credit score
For those not so fortunate who have had debts and perhaps defaulted on a few payments here and there, the problem may be a poor credit score. To improve your score, here are some tactics that can help.
Always make payments on time and pay at least the minimum required each month. Be careful not to exceed your credit limit on any particular card or line of credit. Try to use less than 35% of available credit. Avoid undertaking multiple credit applications and credit checks which can hurt your ranking.
A mix of credit types such as credit cards and lines of credit is preferred versus all credit card loans. Ultimately, carrying a limited amount of credit, keeping up with payments, having a mix of borrowing types, and not attracting attention through approval applications can all have a positive impact on your credit score.
Create an emergency fund
Everyone has setbacks along the way like having an appliance break down, car repairs, or even job layoffs. That’s why it’s important to include saving for emergencies in your budget. With an emergency fund, you’ll be prepared for unforeseen issues.
Buy insurance when needed
For young professionals who are living within their means, setting aside emergency funds, and paying down student debt, the next priority is insurance.
Renters should have insurance for their household effects in case of break-ins or fire. Home and auto insurance are typically mandatory to protect major assets.
Another consideration is health and life insurance. Gone are the days when people stayed with the same company for a lifetime and company benefits covered all insurance needs. Young people are highly insurable because of a lack of pre-existing conditions and time is in your favor. This is your opportunity to get life and health insurance in place as needed while age-related rates are cheap and qualification is easy. Then if you change companies, you know your needs are covered regardless of where you work.
Be prepared for adult life
Whether you lived at home during university or lived off-campus with friends, when you start working as a young professional it may feel monumental to sign a lease for your first apartment or to commit to buying a car. Be prepared to pay first and last month’s rent to confirm a new apartment. Be aware of incidental costs on car purchases that are over and above the listed purchase price. Talking to someone who has already experienced these life events, or consulting with a financial advisor can provide needed information.
Start to invest early
Another great benefit of youth is the length of time that compound interest can work for you. Even a small amount of money set aside each year in an RRSP, Tax Free Savings Account (TFSA) or other savings vehicle will compound over time to create a nest egg that will be valuable for your future well-being. If your employer offers matching investment plans, be sure to take advantage of that benefit.
The sooner you can start setting aside even a small amount of money to invest, the more valuable it will be. Advisorsavvy can connect you with a good financial advisor, or you can begin the investment process with an online platform like WealthSimple. However, you invest, start now and reap the rewards down the road.
Don’t be convinced to lend money
While you may have followed your budget plan and been careful about spending and avoiding debt, your friends or even family members may be in a different position. There’s an old expression ‘Neither a borrower nor a lender be’ and there is wisdom in that philosophy. As you start out in your career be careful of scams and those who would take advantage of any financial success that you’ve achieved. There are other ways to help those you care about, like sharing the financial planning tips that you’ve used to make your life better.