This time around four years ago, I was in your shoes and felt like I had no chance due to my lack of work experience and lack of financial education. It felt like I had no free time, no money and certainly very little work experience. However, I found resources to begin my financial education and became a landlord within weeks of earning my bachelor’s degree.
How can this be? I’m going to share five things I learned as a full-time student to help me start my path to financial freedom.
1. Start building or improving your credit score
Having a credit card is great – if you use it wisely! Don’t be one of those people who is confused about your credit balances and limits.
It’s crucial to consider whether you’re starting your credit score in the right way or how to build and improve your existing credit score. At such a young age in your credit life, you are at greater risk of your credit score going down if you decide to spend without thinking.
You most likely won’t be approved for a huge credit limit on your first card, so it’s important to understand the potential negative effects of overutilizing your credit. It’s generally best to use no more than 30% of your total available revolving credit. If your approved credit card limit is $1,000, I don’t want your credit balance to exceed $300. Once you cross the 30% threshold, you may start to see your credit score deteriorate.
So why does your credit score matter? Lenders use your credit score to determine whether you qualify for a loan, such as a mortgage, car loan, credit card, etc.
Here are other ways your credit score affects your financial future.
lower interest rates
A higher credit score can lead to lower interest rates and better credit card rewards programs. I cannot stress enough how important your credit score is in determining your loan interest rate.
Here’s one way to look at it:
- If you borrow $400,000 at an interest rate of 7.5%, your monthly payment will be $2,797.
- If you borrow $400,000 at an interest rate of 6.5%, your monthly payment will be $2,529.
Look at this, 1% might not sound like much – heck, $268 a month might not sound like much to you. But if you break that down into 30 years, you’d regret that a 1% difference over that time adds up to $96,690.94 Difference. Don’t leave nearly $100,000 behind because of bad personal finance habits!
Apartment for rent
Landlords often check credit scores to assess the risk of renting to you. A good credit score affects your ability to rent from most landlords, and I typically see landlords asking for a minimum credit score between 600 and 700.
2. Start a budget
Software products and consultants will tell you how to create a budget. There are a million and one ways to do it, but to keep it simple, I recommend the following:
Track your net income
If you work a part-time job, have a paid internship, or have other sources of income, it’s crucial to know how much you make each month.
Make a list of your expenses
- Start with your fixed expenses: This includes rent, groceries, school supplies, utilities, gas, phone/internet bill, car loan (if you have one) and other necessary items.
- Enter your variable expenses: These include entertainment, dining out, food delivery, travel and other needs.
Estimate your monthly expenses
- For your fixed expenses, this should be pretty straightforward, as the amount will be deducted from your income at a consistent rate.
- For variable expenses, review the last three months of your credit card and bank statements to get an average expense for each category. You’re bound to find some categories that you didn’t expect to be so expensive.
- make change. Are you net positive? Negative? break even? If your earnings exceed your expectations, move on to the next step! If your expenses exceed your income, I would look further at your variable (want) expenses and find areas that you can cut back on or eliminate entirely. Plus, there’s no shame in picking up extra shifts from a part-time job, an internship, or a summer job!
3. Open an IRA
IRAs (Individual Retirement Accounts) offer special tax benefits over regular brokerage accounts. These can be great opportunities to accumulate savings and develop good habits. You can choose between two options:
- With a traditional IRA, you don’t pay taxes on your contributions or earnings. But after retirement, you’ll need to pay taxes on all qualified withdrawals.
- With a Roth IRA, you pay taxes before you contribute. When you retire, you can make fully tax-free qualified withdrawals.
How do I open an IRA?
Setting up an IRA is easy, and you can find plenty of platforms that offer these services. You may be asking yourself: “How do I open an IRA?”
- Choose a provider: An IRA can be opened at a bank, credit union, brokerage firm, or mutual fund company.
- Complete the application: Complete the application form and provide necessary personal and financial information. You will be asked to provide your Social Security number.
- Fund your account: Make an initial deposit, which can be a one-time deposit or a time deposit.
- Choose investment: Choose how your contributions are invested, typically in stocks, bonds, mutual funds, ETFs, or other investment options offered by your provider.
I highly recommend you consider mutual funds or ETFs. Selecting individual stocks in an attempt to “beat the market” is a risky strategy, and while it may work, as a first-time investor, it’s likely to just expose you to unnecessary risk.
4. Start absorbing financial education materials
You’d be surprised how far you can get without formal financial planning education, and many of the investors I know today don’t have an MBA or finance degree, or may not have even gone to college/university.
At BiggerPockets, we offer the Money Podcast for people looking for financial advice. If you’re looking for more resources, I would check out the top personal finance podcasts on Spotify, Apple’s Podcasts, or YouTube to round out your education. Understanding different metrics, improving your vocabulary, and listening to investors who are in the position you aspire to be will help you go further than you think.
You’ll hear a lot of investors talk about the first book they read that sparked their interest in investing, and I bet 99% of the investors in our community would tell you to read rich dad poor dad Author: Robert Kiyosaki. For someone who hasn’t been exposed to a lot of financial conversations or resources, this book is very eye-opening and I completely agree that you should read it.
My personal favorite is think and grow rich By Napoleon Hill. The book was written in 1937 but is considered one of the best works in the field of personal development and has been widely influential in shaping people’s views on success and wealth.
5. Talk to a financial advisor
After you have some familiarity with the different investment options, some familiarity with financial terminology, and have read steps one through four, I highly recommend talking to a financial advisor. I am by no means a financial advisor; just a regular person who decided to listen to my advisor and start taking these steps to achieve financial success.
I first sat down with a counselor when I was 18, and those early conversations we had were beyond anything I could have imagined. But every quarter, we continued to meet and he would give me assignments such as reading, listening to podcasts, and using extensive calculations to analyze hypothetical future outcomes for my capital investments. I come back with a better understanding each time, and our conversations move from educational to tactical in a very short period of time.
I even remember him suggesting buying my apartment in college and renting it out to my roommates to start my real estate career. I didn’t listen and finally told him I would never be the one who got the call to unblock the toilet at two in the morning. As an active investor, I can honestly say I have never received these calls.
As it turns out, three years after receiving this advice, I finally found BiggerPockets, and the term “house hacking” stuck with me, kicking off my real estate journey.
final thoughts
As a college student, you’ll learn a lot, but financial literacy isn’t part of your curriculum—unless you seek it!
I promise you, sometimes talking about your finances isn’t the sexiest thing in the world, and you might even feel depressed about your current financial situation. you are very young. Take a deep breath and realize that 99.9% of us are just like you, broke. Having a clear financial strategy can pay huge dividends in the long run and may lead to opportunities you never thought possible.
I don’t believe money brings happiness. Money brings freedom, and what you decide to do with that freedom will have one of the biggest impacts on your happiness.
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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.
