College students face a lot of difficult financial decisions when it comes to managing money.
As young people, they have to pay for college, pay rent, earn some pocket change, and get an education all at the same time. That’s a herculean task, so it’s not surprising that many college students end up making some serious money mistakes.
Certain financial mistakes can cause problems that last for decades, so ensuring that your finances are in great shape as a college student can make all the difference in how you start your professional life.
In this piece, I’ll be covering some of the most common financial mistakes college students make and how to avoid them.
Let’s get into it!
Excessive spending and low savings
One of the most common money mistakes college students make is overspending. Because of peer pressure or in an attempt to fit in, many college students purchase things that are not necessary, e.g. designer clothes, premium jewelry and accessories, etc. Because they spend so much on unnecessary things, many college students don’t have enough money to save.
Saving is very important and can come in handy whenever there’s an emergency. Saving a small amount of money every day can provide a monetary safety cushion so that when you run out of money for whatever reason, you still have some money to fall back on.
Not planning for the future
Many students don’t have any plan for how to spend their money.
As a college student, you might not earn a lot of money. If you don’t keep track of how much money you spend, you might end up wasting money on trivial things.
The best way to avoid wasting your money is to set financial goals and create a budget. College is one of the best times to learn budgeting because you have fewer financial responsibilities at this stage of your life. The process of budgeting (and sticking to the budget you set) can inculcate habits that will stay with you for years to come.
Creating a budget doesn’t take long. Here are some steps to create one:
- Set realistic goals.
Make a list of the goals you want to achieve. They can be long-term goals like buying a house, or saving for retirement. They can also be short-term goals like going on a study abroad trip, having an emergency fund to use for unexpected incidents, or reducing your student debt when you graduate.
- Assess your income
Next, calculate how much money you have coming in every month. This could be your salary (if you work), student loans, government assistance, family assistance, disability benefits, or money from other sources.
- Determine your expenses
Review your bank statements or financial records to determine how you spend your money. Then write down all the things you spend money on.
Separate your fixed expenses from variable expenses.
Fixed expenses are the payments you must make, e.g. rent, car payments and insurance. Variable expenses are payments that you can decide whether to make or not, e.g. clothing, gifts, and entertainment.
- Make a plan
Once you know how much money you get monthly and what you’ll use the money for, you can create a plan that matches your goals and expenses with your financial situation. Be careful to not spend more than you make.
- Save for yourself
This is not very necessary, but it’s a great thing to do. Before you start spending any money, try to put 5-10% of it into an account you won’t touch. You can also get a separate savings account for infrequent expenses, like vacations, car insurance and property taxes.
- Track your progress
At the end of every month, you should evaluate your budget. Compare your actual expenses for the month to your actual budget and make adjustments as necessary.
This is because budgets change, and to keep up, you have to stay flexible.
Not knowing the difference between wants and needs
Many college students live above their means because they cannot differentiate between wants and needs. This is why they spend their money on wants and end up not having enough for their needs, such as textbooks and tuition fees.
For example, there are some college courses that require students to travel. That’s a need because if they don’t travel, they might fail the course. On the other hand, college can be a lot of work and one might need a break. A vacation is a great way to take a break, but in this case, the vacation is a want.
Understanding the difference between wants and needs can help college students develop healthy spending habits.
Misusing their credit cards
Credit cards are a great way to pay for things, and many cards offer cash back incentives and reward programs that convince college students to apply for them. While these benefits are great, they often cause students to misuse their credit cards, accumulate debt and ruin their credit scores.
Many cards have high-interest rates and unfavorable terms, which make students spend more money than they have. So to prevent abusing their credit cards, students should first determine if they should even get credit cards.
As a student who wants or has a credit card, you need to:
- apply for a credit card only when you need it
- set limits on the things you use credit cards for
- develop the discipline to not use their credit cards to buy things they can’t afford
- pay the credit balance in full every month. This is extremely important.
- know that the way you use your credit card will affect your credit score–which will affect your ability to get a job, how much money you’ll pay for things like mortgages and loans, and your ability to purchase huge things in the future, e.g. house and car.
- read the application documents carefully when applying for a credit card. Note the fees you’ll be charged, the introductory interest rate, and what the interest rate will be after the introductory period.
Pro-tip: People under 21 cannot get a credit card unless they can prove that they’ll be able to pay their bills with their present income or if they have a cosigner.
Misusing their student loans
The cost of college tuition and living expenses have increased tremendously in recent times and many parents are unable to financially support their children through college. That’s why many students rely on student loans to pay for college.
However, many students use part of their student loan money to purchase things that they don’t need for school. For example, you shouldn’t use your student loan money to pay for a spring break trip or buy the latest clothes. This can put you in a financial hole that you’ll struggle to get out of, even after you graduate.
With student loans, your goal should be to graduate with as little debt as possible. To do that, do the following:
- Use your student loans only for tuition and necessary living expenses.
- If you have excess money at the end of semester, you can either use it for the next semester or send it back to your loan servicer as an advance against repayment.
Doing this will help you funnel your money to achieving financial goals after you graduate, instead of paying off debts.
Forgoing financial aid
If eligible, students should always apply for financial aid. Financial aid can take the burden of paying for college off the shoulders of students and parents, and help them spend their money on other things. Scholarships also save students from graduating with a huge debt to repay.
When you don’t apply for financial aid (scholarship, grants, federal loans, private loans, and work-study programs), you’re only creating a huge problem that will affect you after you graduate.
Do your research into the different forms of financial aid. One of the best sources of financial aid for students, especially in the United States is Free Application for Federal Student Aid (FAFSA). When you apply at FAFSA, you could get extra money to fund your college expenses.
Wrapping It Up
Having a sense of control over your finances is one of the greatest feelings in life.
When it comes to finances, college students should always look on the bright side. Developing great money management habits can be difficult, but with patience and practice, you can do it.
Being conscious of how you spend your money is an experience that can help you gain confidence and become financially successful.