Money isn’t all that matters, but managing it is important. As a student, mortgages and retirement may seem like distant costs, but it’s never too early to start planning your financial future. Money can be a massive source of stress, but with the right knowledge, it doesn’t have to be! Let Common $ense guide you through the basics of saving, investing, and planning for retirement. By taking the time to ensure your financial future, you’ll save yourself a great deal of stress down the road.
Simply put, a budget is an itemized summary of likely income and expenses for a given period. It helps you determine whether you can grab that bite to eat or should head home for a bowl of soup. It is typically created using a spreadsheet, and it provides a concrete, organized, and easily understood breakdown of how much money you have coming in and how much you are letting go. It’s an invaluable tool to help you prioritize your spending and manage your money—no matter how much or how little you have.
Planning and monitoring your budget will help you identify wasteful expenditures, adapt quickly as your financial situation changes, and achieve your financial goals. When you actually see the breakdown of your expenses, you may be surprised by what you find, and this process is essential to fully grasping how things can add up. Creating a budget will decrease your stress levels because, with a budget, there are no surprises. Unexpected car problems or medical bills? That dream vacation your best friends are planning? With a budget, you don’t have to panic or wonder if you have the money—you already know. This sense of financial clarity is important not only in college, but throughout life.
Planning for Your Future
How can I begin saving and investing?
As you become financially independent, saving will become a necessary and important skill to hone. Budgeting effectively and managing your weekly (or monthly) expenses can help you to do so.
One rule of thumb is to always keep enough money in your savings account to cover three to six months of your living expenses. Otherwise, a savings account serves as a place to store money for a large future purchase like a car or house. Thanks to insurance provided by the FDIC, your money (up to $250K) is protected from fraud, theft, or a bank collapse. In other words, there is little to no risk of losing any of your savings, and you will be able to withdraw it when ready. Opening a savings account is easy, and can often be done with a starting sum as small as $10. The only downside to savings accounts, however, is the low return that they pay (low risk - low reward, high risk - high reward).
Once you have built up sufficient savings to cover your unexpected expenses, you should begin to think about investing part of your income, in order to earn a higher return. Investing is crucial to planning your retirement and can, over time, greatly improve your standard of living. This can be done through a variety of investing instruments, ranging from simple stocks and bonds to mutual funds and real estate (more on this in the next section). Regardless of your investing strategy, the earlier you begin, the more time your money has to appreciate. When you start to compound interest on your interest from your investments, the money starts piling up, and you become wealthier!
After you have reached your savings threshold, you'll need to decide how to invest your money going forward. Savings accounts offer very low interest rates, so you'll want to branch out into other investment options. These options range from highly liquid assets with low, but virtually guaranteed, returns (such as money market accounts and certificates of deposit (CDs)), to opening retirement accounts (like 401Ks), which have lower liquidity (due to early penalties for withdrawing funds) but offer a variety of investment types with varying risk. In the middle of the risk spectrum lie brokerage accounts, which enable you to invest in a variety of assets (stocks, mutual funds, index funds, bonds, exchange trade funds, etc.) and to convert your assets back to cash with relative ease. Retirement accounts are typically considered long-term accounts, and allow you to make riskier investments that offer potentially high rates of return in the future. Beware, though: brokerages and most retirement accounts will involve transaction fees each time you buy or sell, and mutual funds will charge annual fees based on the size of your investment.
You can open a money market account or purchase a CD at almost any bank or credit union. To open a retirement or brokerage account, talk to a financial advisor or visit the website of a brokerage firm (such as TD Ameritrade, Fidelity, and Edward Jones).