Lessons in finance

With a little preparation, college students can ace budgeting

A University of Arkansas at Fayetteville student walks in front of the Old Main in Fayetteville last fall. Seven in 10 college students owe an average of $28,000 in student loans, according to an Institute for College Access & Success study in 2013.
A University of Arkansas at Fayetteville student walks in front of the Old Main in Fayetteville last fall. Seven in 10 college students owe an average of $28,000 in student loans, according to an Institute for College Access & Success study in 2013.

It's time to stuff your suitcases full of all your earthly belongings and go shopping for a hoodie bearing some fearsome mascot.

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Courtesy of University of Arkansas at Little Rock

Students walk at the University of Arkansas at Little Rock. Experts recommend students look to online tools such as Mint.com or eMoney to track spending on things such as books, rent and utilities.

You're headed off to college; perhaps it's the first time you will be left to your own financial devices. It's a liberating feeling, but also a period that petrifies financial advisers and parents too.

Faced with student loans -- along with fend-for-yourself expenses like paying for food and rent -- many college students are often unprepared for the financial world they're entering.

"High schools and middle schools don't do a good job preparing students for budgeting," said Ronya Corey, senior vice president of wealth management at Merrill Lynch. "Unfortunately for most students, going to college is a practical exercise in finance."

And increasingly, students are leaving college with a big mound of student loan debt. Seven in 10 college students owe an average of $28,000 in student loans, according to an Institute for College Access & Success study in 2013, the last year for which such data are available.

So how do you get through college with enough fiscal savvy to avoid living with your parents after graduation? Here are five financial tips for college students to help you navigate those four (or five years) and exit with less monetary heartache than your peers:

1. Start thinking about money now, or even before you go off to school.

Develop your financial strategy before you set foot on campus, said Katherine Dean, managing director of wealth planning at Wells Fargo.

Hash out your expenses: tuition, books, rent, food, airfare home for Thanksgiving, entertainment, tickets to football games. Be transparent with yourself and your parents about how much college is really going to cost.

Talk with your parents to get a stronger grasp on what real world expenses look like. Go food shopping with your dad to learn how much groceries cost. Going on a family vacation? Book travel plans with your mom so you know how much your family spends on airfare.

"The earlier the better," Dean said, "because it better equips and prepares them for what they're getting into."

It's never too late to approach your parents or a financial mentor (like a grandparent or family friend) to learn some of the same basics, Dean said.

"Find folks in your life who you see are financially successful and reach out to them informally about what they did and what you should do," she said.

2. Make a budget and stick to it.

Remember all those expenses you laid out? The tuition, books, rent, food, entertainment and whatnot? Set goals for yourself about how much you want to spend on each and

hold yourself to those goals.

Categorize your spending into "buckets," said Rick Harkins, wealth management adviser at Harkins Wealth Management in Providence, R.I. And if you're on track to overspend in one bucket, don't pour money from another into it.

"Stick to those allocations," Harkins said. "If you spend down one bucket, don't take from another."

Use online tools to track your spending habits and help you set accurate goals. Most banks offer free spending-tracking software. Other websites like Mint.com or eMoney do as well.

Some of those tools allow you to set up recurring payments online for monthly expenses, such as rent, utilities and tuition. That takes away some of the risk of accidentally paying a bill late, Harkins said.

And if you're still struggling to figure out your financial priorities, take a class in personal finance, Harkins said. Most colleges offer personal finance courses (which might help you rack up some credits toward that degree) or seminars that can help you nail down the basics and find a system that works best for you.

3. Monitor and protect your credit.

College is the first time a lot of young people get credit or debit cards. It's also the first time young people might take on substantial amounts of debt in the form of student loans.

Opening a credit card may help students establish a financial foothold and create a credit history. But there are potential pitfalls, Harkins said.

Missing a single credit card payment can lower your credit score and increase the fees and interest rate associated with the card. And some credit cards target students with free giveaways, but carry high fees and interest rates.

Compare credit cards to find out the interest rates they charge. Research their fee structures. One card might have a low interest rate, but charge an exorbitant fee every time you withdraw money or make a payment, said Michelle Cortes-Harkins, an adviser at Harkins Wealth Management (and Harkins' wife).

If you have a job in college that gives you a steady and relatively substantial income, start paying down your student loans then and there, Cortes-Harkins said.

If not, make sure you know when the loans will be due, Corey said. If it's not until after you graduate, that gives you time to find a stable job and get your financial feet on the ground before you must start to make payments.

4. Save, save, save, save, save, save, save. Then save some more.

Have you saved yet? You should, financial advisers agree. In fact, take a break from reading this piece to go sock away a few dollars.

College is a time rife with uncertainty, which means students need to have some money on hand for an unexpected expense. What if your car breaks down or you have to fly home suddenly?

Harkins recommends regarding saving as a subscription. If you're willing to pay $7.99 a month for Netflix, couldn't you put aside $10 a month -- or $20 or however much you can afford -- to "pay yourself"?

"As soon as you do have discretionary income and start living on a budget, you can probably find that money," Harkins said.

View your saving as a sliding scale, he said. It's best to stash away 10 percent to 15 percent of your income, but if you have a job, maybe you can afford to save 20 percent. If you're living off an allowance from your parents, maybe save 7 percent or 8 percent.

That's a good way to start saving for retirement or some larger future expenses, such as buying a house or going to graduate school (because no one wants to leave college).

Set up a Roth IRA -- an individual retirement account -- the advisers say. You can invest up to $5,500 a year in a tax-free Roth IRA. You can take $10,000 out of that account after five years without penalty to buy your first house or for more education.

Otherwise, that money you've invested stays locked up accruing interest until you're 59 and a half years old, when -- presto! -- you have retirement savings.

"Students are pretty reluctant to open a Roth IRA because they think, 'I can't access that money for another 40 years,'" Corey said. "To have especially millennials think about long-term planning, I find very difficult. I show people the power of compounding to show them how far ahead it gets them."

Last year, Charles Schwab reported that 87 percent of custodial accounts -- the kind parents or relatives set up for young people -- were Roth IRAs. That's a great way to get started. Ask parents or grandparents or aunts and uncles to match the contribution you make, Corey said.

Young people who are paying their own expenses for the first time are probably wary of locking their money away for the long haul, Corey said. Partnering with adults who can help support a student's financial future is a great incentive to keep saving.

5. Live below, not within, your means.

Think about it this way: If you live below your means during college, you have a bunch of money left over after college when you're thrust into the dark and scary "real world."

Take advantage of student discounts, Cortes-Harkins said. They're everywhere, from riding public transportation, to buying movie tickets.

High school and college students can save 10 percent on Amtrak fares with a "student advantage" card. College students get free two-day shipping from Amazon. Use travel websites such as Kayak and Travelocity to hunt for travel deals.

Think twice about whether you really need that sweater from the bookstore or that extra cup of coffee. Talk with your roommates about sharing expenses for things like groceries or dorm or apartment decor. Talk with your significant other about who pays for every date.

"Talk about money," Harkins said. "I think, in years past, we didn't even talk about money when we were kids. It was a taboo subject."

That shouldn't be the case anymore, he said, especially for young people who have to fend for themselves.

Family on 08/19/2015

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