College Freshmen-Start Building Financial Freedom!

Freshman Financial FreedomIt’s September, and that means back to school time. For many young folks, it’s the first semester of their college career – an exciting time that’s also more than a bit scary. If you’re starting college this fall, there’s more to think about than what classes you’ll take. The habits and discipline you develop now will guide much of your future success in your adult life. This week I would like to talk to our young readers about some money management basics I hope they will find useful – start building your financial freedom today.

First and foremost, learn to budget. A strong budget is the first step towards financial security. I use a simple Excel spreadsheet, and have done so for 20 years. You can also use one of those fancy personal finance budgeting applications, such as YNAB or Mint. Create a budget that accounts for all your income and predictable expenses such as; housing and food costs, transportation and travel, utilities, and entertainment. Even if your parents are helping you with some of this, track your expenses yourself, and always make sure to live within your means.

Americans are more burdened by student loan debt than ever. In fact, the average student loan debt for Class of 2017 graduates was $39,400, up six percent from the previous year. So, understanding and minimizing debt is crucial. Let’s look at some fundamental considerations to help minimize the amount of money you need to see yourself through school.

First consider comparing the costs of living on campus in a dorm to the cost of sharing an apartment off campus with roommates. Often times off-campus life, while maybe not as convenient, will help to reduce the overall college expense. Alternately, if dorm life is for you, or if you’re at a campus where there aren’t a lot of other options, consider becoming a Resident Assistant (RA). While RA’s receive free room and board, it isn’t for everyone. While it is a great opportunity to save money, it does require more responsibility.

You must be persistent. Most high school seniors work extremely hard to earn scholarships and to apply for grant money as they prepare for freshman year of college. Work with your financial aid office at your school throughout your whole college experience. Reapply for scholarships and look for new ones. Elliot Hubbard once said, “A little more persistence, a little more effort, and what seemed hopeless may turn to glorious success.”

William Shakespeare said, “Neither a borrower nor a lender be.” While credit cards can be a good way to begin to establish your credit score, it can also destroy it. You must never charge more than you can pay in full when that statement arrives each month. Establish good financial behavior now. There is nothing that will sink your credit rating faster or quicker than delinquent payments.

Credit card companies will entice new recruits with offers such as, interest-free balance transfers, easy reward perks, and most commonly, low or 0% Annual Percentage Rate (APR) introductory rates. These are initial rates and will go up over time. The average interest rate on credit cards in the U.S. is 16.41%, according to CreditCards.com. Understand what your interest rate will shoot up to after your introductory period is done.

Also, work to your keep a low credit utilization ratio. The credit utilization ratio is the percentage of how much you owe, compared to your available credit. Credit scoring models favor consumers who don’t use more than 30% of their available credit, according to NerdWallet. For example, if your credit card has a $1,000 limit, then $300 must be the absolute maximum balance to help facilitate a low credit utilization ratio. I know, it is easy to think you can afford more, but be smart here. Remember, there are no short cuts in achieving financial health. It involves immense discipline and hard work.

You see, there are two basic types of debt, installment debt, such as student loans, and revolving debt, like a credit card. While both affect your credit utilization ratio and score, installment loans have a smaller impact on them than revolving debt.

Becoming fiscally disciplined is essential to help building a solid financial foundation for the rest of your life. Living within your means and using credit responsibly will compound later in adult life . . . when it matters. Responsible credit utilization leads to higher credit scores which will affect future interest rates you may incur for auto loans, mortgages – it can even determine future employment.

Lastly, always pay yourself first. From each paycheck for the rest of your life should come some deposit into some form of savings vehicle before bills and expenses are paid. As I tell my kids, it is the little things that make a big difference. And saving now will make a big difference later in life.

I know retirement may seem like a lifetime away; I get it. I have walked in your shoes. But compound interest, the idea that money compounds on top of money, is your best financial friend. Albert Einstein once said, “ Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it. Compound interest is the most powerful force in the universe.”

Going to college, picking a major, working hard to get your degree are all essential building blocks to a rewarding life. Freshman, implementing financial discipline and becoming financially fit are essential building blocks to financial freedom.

Be vigilant and stay alert, because you deserve more. You can do this.

Good luck in school this year!

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, a wealth management firm with offices is Falmouth, Duxbury, and Mansfield. Jeff can be reached at jeff@old.cutterfinancialgroup.com.

Cutter Financial Group LLC (“Cutter Financial”) is a SEC Registered Investment Advisor.

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