Start smart: College saving, spending tips to move into adulthood on a good financial footFARGO – Beginning college with retirement in mind can set students up for a solid financial future.
By: Sherri Richards, INFORUM
FARGO – Beginning college with retirement in mind can set students up for a solid financial future.
Chris Mason, an associate professor of finance at Concordia College’s Offutt School of Business, says this is one of three skills he encourages students to adopt in college.
Mason, also president and chief investment officer of Fontis Investments in Minneapolis, says he talks about personal finance in every class, and at some point, with nearly every student he encounters.
The overarching goal for any student should be to graduate with as little debt as possible, he says.
Mason says he’s surprised how many students have it figured out, graduating with little debt and even some retirement dollars saved.
However, he says today’s students often have a sense of entitlement that can derail budgets.
First, Mason tells students to have an accountability partner, often a parent, who can go through the student’s financial plan and provide guidance and objective advice when the plan is derailed.
“Those things that are urgent in your mind may really not be that urgent. They may be important to you at that point in time, but they may not be urgent,” Mason says.
Students should create a budget for their four years of school, and then break it down into yearly, semester and monthly budgets, making a best guess about expenses like tuition, books, housing and food, as well as incoming funds.
Mason says students should consider four categories when considering where money comes from: income, gifts, savings and debt. They also need to ask when the money will be available.
“Often the timing piece creates an emergency,” Mason says.
For example, if books must be purchased before student loan money arrives. “Have a healthy skepticism on those dates.”
Finally, he encourages that retirement mindset about each dollar spent in college.
Mason likes to joke he bought a $315,000 car when he was 25.
The car actually cost $37,000, an amount that could have conservatively grown to $315,000 by the time he’s 65.
“Had I thought about it being a $315,000 decision, I probably wouldn’t have bought that $37,000 car,” he says.
Mason advises students to think of all purchases that way. A daily coffee isn’t a $2 decision, but a $730 yearly decision. And $730 invested every year from age 19 until retirement could be worth more than $165,000, assuming a 6 percent return.
“It’s not to say no to everything, but it’s to prioritize and say ‘What’s the most important thing?’ ” Mason says.
“Look past the moment, always backing up to the bigger picture,” he adds. “The decisions we make have a long-term impact. Developing those skills will have a lifelong impact.”
HEED THE LOAN CRISIS
Morgan Almer, a financial counselor with the Village Family Service Center, says in his industry, student loan debt is the next big financial crisis.
More and more of the Village’s clients are burdened with student debt, he says. Statistics he’s read show 10 to 15 percent of the nation’s $1 trillion in student loans are currently in default.
Students should heed these present-day woes as a cautionary tale.
“What we’re advising a lot (is to) make sure you know what career path you’re going to take and the potential earnings from that career path before you start borrowing tons and tons of money,” Almer says.
One rule of thumb is to not borrow more in total student loans than the student expects to earn in salary the first year out of school, a spokeswoman for the Boston-based nonprofit American Student Assistance said in an article on Bankrate.com.
Almer says that is an OK guideline, but difficult for people to follow.
Mason says there really can’t be a one-size-fits-all guideline, as student circumstances, including family contributions, vary so greatly.
Federal student loans are generally preferable to private loans, as they have more repayment options available, Almer says.
DOLLARS AND DEBT
Ross Almlie of TCI Financial Advisors in West Fargo, says he thinks credit cards are “the ill of college life.”
Students often think they’ll be making a large salary as soon as they graduate. “That thought in their head allows them to justify that credit card,” he says.
Racking up credit card debt in college hamstrings a student’s financial future.
Budgeting and living within a plan can prevent students from abusing credit cards.
Almlie is also founder and CEO of Breadvault, an online and mobile tool for kids to track dollars and savings goals. He says Breadvault encourages its young users to allocate 70 percent of their money for spending, 20 percent for investing and 10 percent for giving. The company also advocates parents match the investing dollars.
It’s also important for students to have some emergency funds, a buffer, perhaps of $500, Mason says.
“Often when those emergencies happen, that’s when the temptation of ‘I’ll just put that on my credit card’ … the slippery slope of going outside the plan starts to happen,” Mason says.
Readers can reach Forum reporter Sherri Richards at (701) 241-5556
Financial tools for the college student
College can be a time for young adults to build a positive credit history and learn good money management skills, if they have the right tools.
If the student doesn’t yet have one, now’s the time to get a checking account, says Morgan Almer with the Village Family Service Center. Look for a “free” account with no minimum balance required, he says.
Mobile apps and websites can make tracking expenses easy. Almer recommends Mint.com.
Prepaid cards, purchased at a big box store and load-ed with a set amount of cash, are another way students can control spending, he says.
Using credit wisely can help students build a favorable credit score, a boon when applying for home or auto loans, an apartment and sometimes even a job.
Parents can add their children as authorized users to their credit cards, creating a credit history for them, even when they are minors. This can often be done easily through the credit card’s website, Almer says.
The student doesn’t need to be issued a card. However, the parent needs to use the card responsibly for the child to inherit a positive score.
A secured credit card, offered by banks, can also help students work toward building a positive financial track record, Almer says.
The student must deposit a minimum amount of money (usually a few hundred dollars) at the bank as collateral, and then is given a card with a small limit.
If the student proves her-self, staying under the limit and paying the credit card bill on time, after several months, she will be issued a regular credit card and given the deposit back.
Any student who has earned income can con-tribute to a Roth IRA, an individual retirement account that allows after-tax contributions to grow tax-free.
Thanks to compound interest, this can make a huge difference for the student when retirement rolls around, says Chris Mason, a Concordia College finance professor.
“The most important dollars put away are when you’re 22. The second most important are when you’re 23. The least important from a significance stand-point is when you’re 65,” Mason says.