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Get Ready for FAFSA Season!
Guest Contributor
By Tracy Odell
In college, students are developing new skills non-stop. Taking classes, meeting new people, learning about themselves and the world around them... But college is also a jumping-off point for their finances for the rest of their lives. So, no pressure!
Would you like your student to make a smooth financial transition from college life into the real world? It’s important they set themselves up for success early. Here are tips you can share with your student as they finish their degree and prepare to graduate.
Debt is viewed as something that ties you down financially and causes loads of stress and discomfort. This is often true, but it doesn’t paint the whole picture. Loans and credit cards are some of the most common forms of debt, but that doesn’t mean they can’t be useful.
For example, responsibly using a credit card can help your student build their credit. They can pay for essential purchases they’re already making, such as groceries and gas, and then pay off the card. Building a positive credit history can help them qualify for better interest rates on auto loans and mortgages when they’re ready to take those steps in the future.
In addition, the best credit cards for recent college grads don’t typically require perfect credit or an extensive history. This makes it easier to qualify for these cards and get started with building credit.
Learning how to invest can happen at any age, but it makes sense for a recent college graduate to start investing as early as possible. With the magic of compound interest, an investment can grow by large amounts over time.
Compound interest is simple and straightforward — it’s basically interest you earn on interest. So the more time your student gives their funds to grow, the more interest they’re likely to earn.
For example, a one-time investment of $5,000 into an account that earns 1% interest each year would net about $1,100 over 20 years. Because of compound interest, your graduate ends up with about $100 more than they would have otherwise.
Now imagine that they contributes to their investments on a regular basis for 40 or more years until retirement age. They could easily earn returns on their investment that are much higher than this example.
Student loans may have helped pay for your student’s education, but they shouldn’t keep them around as a nostalgic reminder of their college days. Rather, they should start making payments on their loans ASAP.
The benefits of paying off student loans early far outweigh the drawbacks. Your student or new grad may think they’re keeping money in their pockets by holding off on payments, but they’ll end up paying out more money the longer they have a loan. This is because part of their payments is going toward interest, and interest doesn’t stop accruing until the loan is paid off.
Financial emergencies, such as your car breaking down or having to replace an expensive laptop you use for work, are bound to happen at some point. If your new graduate follows some simple advice on saving, they can reduce the amount of financial stress they’ll feel when the unforeseen occurs. Building up an emergency fund is one of these steps.
An online savings account is a tried-and-true strategy for saving money. Your recent college grad can easily contribute money to their savings account on a regular basis until they feel they have enough for their emergency fund.
The amount of money they'll need to put away depends on their situation and goals. They should first consider their common expenses. Then they can set savings goals for how long they want the emergency fund to be able to cover those expenses in the event they have no income.
Post-college life is going to have its share of new experiences, whether it’s finding a place to live, getting a first job, or moving to a different city. If your graduate wants to stay in a financially stable situation throughout these changes, they should focus on living within their means.
It may be tempting to start splurging on things due to a sense of newfound freedom and more income, but there has to be some self-control involved. Learning how to make and stick to a post-college budget can help your grad keep their expenses top of mind so they aren’t making unnecessary purchases. A budget can also help shift their focus away from comparing themselves to (and trying to keep up with) friends or coworkers.
Graduating from college may be the end of an era, but it can also be the start of a new and healthy financial situation. A student who makes the decision now to increase their financial awareness will be that much better off when graduating from college and beyond. These simple tips can jump start their knowledge and put them on a path to a bright financial future.
