College Students, Own Your Future
4 ways to harness personal finance and invest in yourself during economic unrest
By Eva Tirion
Let’s face it. 2020 has been a terrifying year for many college students to launch their careers and take control of their personal finances. You might feel overwhelmed by the lack of job opportunities, the pandemic-driven economic recession, or a million other uncertain pieces of your future. Money Muse is here to help you harness the things you can control and transform from a place of fear to a place of empowerment.
CREATE A POSITIVE MONEY MINDSET
Let’s start with the simplest step you can take right now. Do yourself a favor and start discussing money with friends you trust. Speaking from a place of vulnerability and honesty will make your money journey less scary. It will also encourage your friends to share their experiences. Here are some questions to get you started:
If you are soon to be graduating from college or have just graduated, envision a life for yourself. What are your priorities? What does wealth mean to you?
Imagine you have infinite funds. How would you feel?
Imagine you’re 70. What does the perfect day in a fabulous life look like? Craft a vision of your future financially independent self, and use your goals to inform your decisions.
KEEP TRACK OF SPENDING AND BUDGETING
Between the implications of social life, the weight of student loans, and the potentially stricter budget you are on now than when you lived with your parents, your spending in college might feel skewed and patternless. However, there are still plenty of opportunities to be mindful with your spending. At Money Muse, we like to say that spending isn’t money out the door. Spending is an investment in present you!
What are some investments in present you that you would like to prioritize? Saving for studying abroad? Healthy groceries for a night of cooking with your roommates? A gym membership? That morning latte before your test? If you transform your mindset, spending is an investment in your happiness and an opportunity to express your priorities and values. Here is a list of the best budget apps to track your spending (Mint is our personal favorite!).
As you create your college or post-college budget (or spending plan as we like to call it), try to set aside enough money to sustain you for at least one month, in case of an emergency. This is especially important right now with job insecurity, family members you may no longer be able to rely on, or other extenuating circumstances. Calculate a dependable monthly amount to protect you here.
START INVESTING!
Whether you are completely new to investing or are itching to strengthen your portfolio, Money Muse will meet you where you’re at! If you want more guidance on investing, sign up for Stephanie’s Investing 101 webinar. For now, here are some quick tips.
Decide whether you want to open a Traditional IRA or a Roth IRA. An Individual Retirement Account (IRA) is a tax-friendly account for retirement savings: your “forever” account. A Traditional IRA means that you don’t pay taxes on the money you contribute now, but you pay taxes when you withdraw money from the account upon retirement (also known as at distribution). Conversely, a Roth IRA means you pay taxes now, but no taxes are paid on gains at distribution. Unlike a Traditional IRA, there are no penalties for early withdrawal (before the age of 59 ½) for a Roth IRA because your contributions have already been taxed. This can be helpful if you get into a tough financial situation down the road. Generally, when income tax rates are low, or when you are in a low tax bracket because of your income level, it can be a good time to pay taxes and take advantage of the Roth. You can use this calculator to predict which might be better for you, Roth or Traditional.
As New York Times bestselling author Phil Town put it, “Roth IRAs are so good that they probably aren’t going to last!” Even if that’s not the case, you should still open one soon! Whichever IRA you choose, then decide on a monthly amount to contribute (even if that means $50!) and set up automated investing.
Upon opening your IRA, you then have to choose where to invest your money. Money Muse recommends investing in a target-date fund (a fund that maintains the correct percentage of stocks and bonds for your age, now and forever). It is a straightforward and low-maintenance option, perfect for college students and young investors. Just be sure to keep an eye on the fees, called an “expense ratio.” Choose funds that have an expense ratio of less than .2% as fees are the number one predictor of long term performance.
MINIMIZE STUDENT DEBT
You might be feeling the crushing anticipation of new student loans as August approaches. Or perhaps you are entering your professional life with debt and are starting repayments. Either way, it is important to take active steps to minimize your student loan debt so it doesn’t limit your future!
Some general rules for student loans are reduce, refinance, and automate. First, reduce the amount of money you originally borrow; only borrow what you really need. Second, as soon as you graduate you should assess whether refinancing is a good option. With interest rates at record lows, it might be a great time to refinance. A quick peek at Sofi will let you know if you can save money by refinancing to a lower interest rate. If you have loans that have an interest rate of higher than 5%, you should look to refinance. And finally, automate! Set up your student loan payments to automatically deduct each month from your account. Once your interest rate is below 5% you can begin focusing on longer-term financial objectives, such as building up your emergency savings and investing in your retirement accounts. Don’t let your student loans inhibit you from pursuing your goals!
Above all else, be kind to yourself and patient with your journey.
Are you taking active steps to invest in present and future you? Schedule a free consultation call with Stephanie to learn more or get started refinancing your loans and setting up your first investment account!