Chapter 11 Taking Control of Your Finances

What Are Your Financial Goals?

Whatever it is you plan to do in your future, whether work or other activities, your financial goals in the present should be realistic to enable you to fulfill your plan. Consider these scenarios:

What Keri and Jorge have in common is a conflict between their financial goals and realities. Both were motivated to succeed in college, and both had a vision for their future. But both were unsuccessful in finding ways to make their dreams come true—because of money issues.

Could they have done things differently? Maybe Keri could have gone to a less expensive school and still reached her goal, or maybe she could have avoided such heavy student loans by working summers and part time during the school year. Maybe Jorge could have reduced his living expenses and cut back his work hours to ensure he could balance school and work better. Maybe both were spending thousands of dollars a year on things they could have done without if only they’d thought through their goals and learned to live within a budget.

Taking control of your personal finances begins with thinking about your goals and deciding what really matters to you. Here are some things to think about:

• Is it important for you to graduate from college without debt? Is it acceptable to you, or necessary, to take some student loans?
• What are your priorities for summers and other “free time”? Working to earn money? Taking nonpaying internshipsA paid or unpaid position in a formal program designed for a student to gain practical experience in a career field. or volunteering to gain experience in your field? Enjoying social activities and time with friends?
• How important is it to take a full load of classes so that your college education does not take longer than necessary?
• How important is it to you to live in a nice place, or drive a nice car, or wear nice clothes, or eat in nice restaurants? How important in comparison to your educational goals?

There are no easy answers to such questions. Most people would like enough money to have and do what they want, low enough expenses that they don’t have to work too much to stay on budget, and enough financial freedom to choose activities without being swayed by financial concerns. Few college students live in that world, however. Since you will have to make choices, it’s important first to think about what really matters to you—and what you’re willing to sacrifice for a while in order to reach your goals.

Make More or Spend Less?

That often becomes an issue for college students. You begin by setting up a realistic budget and sticking to it. A budgetAn organized plan for coordinating income and expenditures. is simply the best way to balance the money that comes in with the money that goes out.

For most college students, the only way to increase the “money coming in” side of the budget is to work. Even with financial support from your family, financial aidFunds or a tuition waiver in a formal program designed to help students pay for college; forms of financial aid include scholarships, grants, student loans, and work study programs. from the college, your savings from past jobs, and the like, you will still need to work if all your resources do not equal the “money going out” side of the budget. The major theme of this chapter is avoiding debt except when absolutely necessary to finance your education. Why is that so important? Simply because money problems and debt cause more people to drop out of college than any other single factor.

This chapter includes discussion of how students can earn money while in college and the benefits of working. But working too much can have a negative impact by taking up time you might need for studying. It’s crucial, therefore, whenever you think about your own financial situation and the need to work, to also think about how much you need to work—and consider whether you would be happier spending less if that meant you could work less and enjoy your college life and studies more. As we’ll see later, students often spend more than they actually need to and are often happier once they learn to spend less.

A Job Can Help or Hurt

In addition to helping pay the bills, a job or internship while in school has other benefits:

• Experience for your résuméA document used to summarize the experience of a person.
• Contacts for your later job search network
• Employment references for your résumé

Work or internship experience related to your future career has significant value. Not all students can find such opportunities in their community, however. But even a job or volunteering outside your field can have value and say something about you to future employers. Your job may demonstrate that you have initiative, are responsible, are a team player or can work independently, and can take on financial responsibility. Potential future employers will check your work references. Having an employer from your college years say you did a good job, were always on time to work, and were honest and responsible in doing your job definitely gives you an advantage over students who graduate without having worked at all.

At the same time, some jobs contribute more to your overall college experience. Remember, you’re in college for an education and to gain a wide range of skills—not just for the degree. The best student jobs help you engage more deeply in the college experience, while the wrong kind of job gets in the way of that experience. Here are some factors to consider as you look for a job:

• What kinds of people will you be interacting with? Other students, instructors, researchers? Interacting with others in the world of college can broaden your college experience, help motivate you to study, and help you feel part of a shared experience. You may work with or meet people who in the future can refer you to employers in your field. On the other hand, working in a business far from campus, for example, may offer a steady paycheck but can separate you from the academic community and detract from a positive college experience.
• Is the job flexible enough to meet a college student’s needs? Will you be able to change your work hours during final exam week or when a special project is due? A rigid work schedule may cause difficulty at times when you really need to focus on your classes.
• What will you be able to say about your work in your future résumé? Does it involve any skills—including people skills or financial or managerial responsibilities—that your employer can someday praise you for? Will working this job help you get a different, better job next year?

These factors can make a job ideal for college students, but in the real world many students will have to work less-than-ideal jobs. Working at a fast food restaurant or overnight shipping company may not seem very glamorous or offer the benefits described previously, but it may be the only job available at present. Don’t despair—things can always change. Make the money you need to get by in college but don’t become complacent and stop looking for more meaningful work. Keep your eyes and ears open for other possibilities. Visit the campus student employment office frequently (or check online) for new postings. Talk to other students.

At the same time, even with a dull job, do your best and keep a good attitude. Remember that your boss or supervisor may someday be a work reference who can help (or hurt) your chances of getting a job you really want.

Student Jobs

The number of hours college students work per week varies considerably, from five to ten hours a week to full time and everywhere in between. Before deciding how much you need to work, first make a detailed budget as described later. Your goal should be to make as much as you need, and hopefully a little more to save, but first you need to know your true need. Remember your goals in college and stay focused on your education. Cut back on your optional spending so that you don’t have to work so many hours that your studies are impacted.

Balancing the Job You Have with Your Ideal Job

A growing percentage of students are working full time when they return to school, and many continue in the same jobs. If you’re in this situation, you know that balancing work and college is one of the most difficult things you’ve ever done. You’re used to working—but not used to finding time for class and studying at the same time. You likely feel harried and frustrated at times, and you may even start to wonder if you’re cut out for college. The time may come when you start thinking about dropping classes or leaving college altogether. It may be hard to stay motivated.

If you start feeling this way, focus on your big goals and don’t let the day-to-day time stresses get you down. As difficult as it may be, try to keep your priorities, and remember that while you face temporary difficulties now, a college degree is forever.

• Acknowledge that sacrifice and compromise may be needed.
• Reduce your expenses, if you can, so you can cut back on the number of hours you work. This may mean temporarily giving up some things you enjoy in order to reach your goals.
• If you cannot cut your expenses and work hours and simply do not have the time to do well in your classes, you may have to cut back on how many classes you take per term. Try everything else first, but know that it’s better to succeed a little at a time than to push too hard and risk not succeeding. If you do have to cut back, keep a positive attitude: you’re still working toward your future ideal.

If you ever feel the temptation to quit, see your college counselor to explore all your options. Resources may be available that you don’t know about.

Spending on Essentials, Spending on Optionals

More people get into financial trouble because they’re spending too much than because they’re making (or receiving) too little. While spending may seem a simple matter—“I need to buy this, I’d like to buy that”—it’s actually very complex. America is a consumer society, and we’re deluged by advertisements promising that we’ll be happier, more successful, better liked by more people, sexier, and everything else if only we buy this. Companies have spent billions of dollars researching how to manipulate our buying behavior. No wonder it’s so tough to resist these pressures!

Why does a person feel compelled to buy fast food for lunch, or a new CD with a song they just heard on the radio, or a new video game a friend says is so good, or a new article of clothing? We owe it to ourselves to try to understand our own attitudes about money and spending. Here’s a good place to start:

• Having money or not having money doesn’t define who you are. Your real friends will think no less of you if you make your own lunch and eat it between classes or take the bus to campus rather than drive a new car. You are valued more by others for who you are as a person, not for what things you have.
• You don’t have to spend as much as your friends to be one of the group. Some people always have more money than others and spend more. Resist any feeling that your friends who are big spenders are the norm. Don’t feel you have to go along with whatever expensive activities they propose just so you fit in.
• A positive attitude leads to success. Learn to relax and not get stressed out about money. If you need to make changes in how you spend money, view this as an exciting accomplishment, not a depressing fact. Feel good about staying on a budget and being smart about how you spend your money.
• Be realistic about what you can accomplish. Most students have financial problems, and they don’t just go away by waving a magic wand of good intentions. If your budget reveals you don’t have enough money even while working and carefully controlling your spending, you may still need a student loan or larger changes in your lifestyle to get by. That’s OK—there are ways to deal with that. But if you unrealistically set your sights so high about spending less and saving a lot, you may become depressed or discouraged if you don’t meet your goals.

Before you can make an effective budget, you need to look at what you’re spending money on now and consider what’s essential and what’s optional. Essential costs are the big things:

• Room and board or rent/mortgage, utilities, and groceries
• College tuition, fees, textbooks, supplies
• Transportation
• Insurance (health insurance, car insurance, etc.)
• Dependent care if needed
• Essential personal items (some clothing, hygiene items, etc.)

These things are sometimes called fixed costs, but that term can be misleading. If you have the option to move to a less expensive apartment that is smaller or a few blocks farther away, you can partly control that cost, so it’s not really “fixed.” Still, for most people, the real savings come from spending less on optional things.

Look back at the amounts you wrote in the earlier exercise “Where Does the Money Go?” These things are “optional” expenses—you can spend more or less on them as you choose. Most people spend by habit, not really thinking about where their money goes or how quickly their spending adds up. If you knew you were spending more than a thousand dollars a year on coffee you buy every day between classes, would that make you think twice? Or another thousand on fast food lunches rather than taking a couple minutes in the morning to make your lunch? When people actually start paying attention to where their money goes, most are shocked to see how the totals grow. If you can save a few thousand dollars a year by cutting back on just the little things, how far would that go to making you feel much better about your finances?

Following are some general principles for learning to spend less. The “Tips for Success” then lists specific ways you can try to follow these principles in your daily life. Remember, spending money doesn’t define who you are!

• Be aware of what you’re spending. Carry a small notebook and write down everything—everything—you spend for a month. You’ll see your habits and be able to make a better budget to take control.
• Look for alternatives. If you buy a lot of bottled water, for example, you may feel healthier than people who drink soft drinks or coffee, but you may be spending hundreds of dollars a year on something that is virtually free! Carry your own refillable water bottle and save the money.
• Plan ahead to avoid impulse spending. If you have a healthy snack in your backpack, it’s much easier to not put a dollar in a vending machine when you’re hungry on the way to class. Make a list before going grocery shopping and stick to it. Shopping without a list usually results in buying all sorts of unneeded (and expensive) things that catch your eye in the store.
• Be smart. Shop around, compare prices, and buy in bulk. Stopping to think a minute before spending is often all it takes.

Tips for Success: Spending Less

• Make your own lunches and snacks.
• Read newspapers and magazines online or in the library.
• Cancel cable television and watch programs online for free.
• Use free campus and local Wi-Fi spots and cancel your home high-speed Internet connection.
• Buy genericAny product commonly marketed under a brand name that is sold in a package without a brand. products instead of name brands.
• Shop at thrift stores and yard sales.
• Pay with cash instead of a credit card.
• Cancel your health club membership and use a free facility on campus.
• Compare prices online.
• Avoid ATM fees by finding a machine on your card’s network (or change banks); avoid checking account monthly fees by finding a bank with free checking.
• Get cash from an ATM in small amounts so you never feel “rich.”
• With larger purchases, postpone buying for a couple days (you may find you don’t “need” it after all).
• Look for free fun instead of movies and concerts—most colleges have frequent free events.
• If you pay your own utility bills, make it a habit to conserve: don’t leave lights burning or your computer on all night.
• Use good study skills to avoid failing a class—paying to retake a course is one of the quickest ways to get in financial trouble!

Figure 11.2

Paying with cash rather than a credit card helps you stay aware of your spending habits.

© Thinkstock

Managing a Budget

Budgeting involves analyzing your income and expenses so you can see where your money is going and making adjustments when needed to avoid debt. At first budgeting can seem complex or time consuming, but once you’ve gone through the basics, you’ll find it easy and a very valuable tool for controlling your personal finances.

Why create and manage a budget? Going to college changes your financial situation. There are many new expenses, and you likely don’t know yet how your spending needs and habits will work out over the long term. Without a budget, it’s just human nature to spend more than you have coming in, as evidenced by the fact that most Americans today are in debt. Debt is a major reason many students drop out of college. So it’s worth it to go to the trouble to create and manage a budget.

Managing a budget involves three steps:

1. Listing all your sources of income on a monthly basis.
2. Calculating all your expenditures on a monthly basis.
3. Making adjustments in your budget (and lifestyle if needed) to ensure the money isn’t going out faster than it’s coming in.

Balancing Your Budget

Now comes the moment of truth: compare your total monthly incoming with your total monthly outgoing. How balanced is your budget at this point? Remember that you estimated some of your expenditures. You can’t know for sure until you actually track your expenses for at least a month and have real numbers to work with.

What if your spending total is higher than your income total? The first step is to make your budget work on paper. Go back through your expenditure list and see where you can cut. Remember, college students shouldn’t try to live like working professionals. Maybe you are used to a nice haircut every month or two—but maybe you can go to a cheaper place or cut it yourself. There are dozens of ways to spend less, as suggested earlier. The essential first step is to make your budget balance on paper.

Then your job is to live within the budget. It’s normal to have to make adjustments at first. Just be sure to keep the overall budget balanced as you make adjustments. For example, if you find you must spend more for textbooks, you may decide you can spend less on eating out—and subtract the amount from that category that you add to the textbook category. Get in the habit of thinking this way instead of reaching for a credit card when you don’t have enough in your budget for something you want or need.

Don’t be surprised if it takes several months to make the budget process work. Be flexible, but stay committed to the process and don’t give up because it feels like to too much work to keep track of your money. Without a budget, you may have difficulty reaching your larger goal: taking control of your life while in college.

Budgeting on Your Computer

If you are good at Excel or another spreadsheet program, you can create your own budget in a spreadsheet that allows you to monitor your income and expenditures month to month, with the calculations done for you. Other budget calculators can be found online. Figure 11.3 "Simple Online Budget Calculator" shows a simple online budget calculator. The categories are general, but you can add up your numbers from Table 11.2 "Monthly Expenditures" in these categories and enter them in the online budget form, which then does the calculations for you.

Figure 11.3 Simple Online Budget CalculatorFederal Student Aid, “Budget Calculator,” Federal Student Aid Direct Loans, http://www.ed.gov/offices/OSFAP/DirectLoan/BudgetCalc/budget.html (accessed July 13, 2010).

Most college students can do well with a simple budget that helps you track monthly income and expenditures so that you can make adjustments as needed. If your financial life is more complicated or you would enjoy full financial tracking and control using your computer, a software program like Quicken has all the power you need and can download your banking and credit card records to easily track categories of expenses over time. A free online budget and tracking system is available at Mint.com.

Saving for the Future

If you’re having problems just getting by on your budget, it may seem pointless to even think about saving for the future. Still, if you can possibly put aside some money every month into a savings plan, it’s worth the effort:

• An emergency or unexpected situation may occur suddenly. Having the savings to cope with it is much less stressful than having to find a loan or run up your credit cards.
• Saving is a good habit to develop. Saving for the future will prepare you well for the increasing financial complexities of life after graduation.
• You may need your savings to help launch your career after graduation. If you’re broke when you graduate, you may feel you have to take the first job that comes along, but with some savings you may have time to find the job that’s perfect for you.
• You may change your mind about future plans. Maybe you now think that you’ll go to work at a good job right after graduation, so you’re not concerned about saving—but maybe in a couple years you’ll decide to go to graduate school, law school, or business school—or to start your own business, or to join a volunteer program. Your savings may allow you to pursue a new goal.

Start by saving in a savings account at your bank or credit unionA cooperative association that offers banking services to employees and often students at a particular college, possibly at rates more competitive than a private bank.. You can have a certain amount transferred from your checking account every month into a savings account—that makes it easier and more routine. A savings account allows withdrawal anytime but pays lower interest than other accounts. Ask at your bank about money marketA specific type of investment and spending account offered at many banks that may pay a higher interest rate. accounts and certificates of deposit (CDs)A bank deposit, usually made for a fixed term, at a specified interest rate that is typically higher than the rate of a regular savings account, involving a penalty for early withdrawal., which generally pay higher interest but have restrictions on minimum balances and withdrawals. Savings bonds are another option. All of these options are federally insured, so your money stays safe. Risky investments like the stock market are generally not appropriate for college students on a budget.

Setting Limits

All credit cards come with a limit, the maximum total amount you can charge, but this is not the same as the limit you should set for how you use the card based on your budget. If you bought something that cost $400, for example, would your monthly budget let you pay it off when the bill comes? If it will take you two or three months to have that much available in your budget, are you also including the interest you’ll be paying? What if an unexpected need then arises and you need to charge more?

Set your personal use limit by calculating how much your budget allows you to charge. If you are using the card just for convenience, such as to pay for meals or regular purchases, be sure you have enough in those categories in your budget left at the end of the month to make the payment. If tempted to buy a significant item with your credit card, do the calculations in advance.

Avoiding Debt

If your credit card debt is not limited by your age, that balance can rapidly rise. Before the 2010 regulations, the average student had accumulated a debt estimated as high as $3,000. Following are tips that will help you avoid slipping into credit card debt:

• Pay with cash when you can. Use your budget as a guide for how much cash to carry with you. A good way is to plan how much you’ll need for a week (lunches, parking meters, snacks or drinks between classes) and start the week with that amount from an ATM. Carrying that exact amount helps you stay informed of how you’re doing on your budget and keeps you from “accidentally” spending too much on a whim.
• When possible, use a debit card instead of a credit card. A debit card is taken just like a credit card in most places, so you can use it instead of cash, but remember that a purchase is subtracted immediately from your account. Don’t risk overdraftThe act of withdrawing (or purchasing with a debit card) more funds from an account than are in the account at the time. fees by using a debit card when you don’t have the balance to back it up. Record a debit card purchase in your checkbook register as soon as possible.
• Make it a priority to pay your balance in full every month. If you can’t pay it all, pay as much as you can—and then remember that balance will still be there, so try not to use the card at all during the next month.
• Don’t get cash advances on your credit card. With most cards, you begin paying interest from that moment forward—so there will still be an interest charge even if you pay the bill in full at the end of the month. Cash advance interest rates are often considerably higher than purchase rates.
• Don’t use more than one credit card. Multiple cards make it too easy to misuse them and lose track of your total debt.
• Get and keep receipts for all credit card purchases. Don’t throw them away because you’ll see the charges on your monthly statement. Write the amounts down in your spending budget. You also need the receipts in case your monthly statement has an error.
• Stop carrying your credit card. If you don’t have enough willpower to avoid spontaneous purchases, be honest with yourself. Don’t carry the card at all—after all, the chances of having an emergency need for it are likely to be very small. Having to go home to get the card also gives you a chance to consider whether you really need whatever it is that you were about to buy.

Credit History and Reports

Many younger college students are just beginning to develop a credit historyA general term referring to a person’s past use of credit and payment patterns.. Older students likely have had credit cards for years, as well as automobile and other types of loans, possibly a mortgage, and other financial transactions that add up to a credit history. But everyone needs to understand what a credit history is and how your monetary habits now can affect your future financial well-being and your future options. For example, frequent overdrafts on a debit card can prevent you from being approved for a credit card, or late credit card payments can prevent you in the future from obtaining a car loan.

Credit bureaus collect financial data on everyone. The credit reportA written report, compiled by a credit bureau, listing the details of a person’s credit history, possibly including a credit rating, FICO score, or both. they issue is a detailed history of many years of your financial habits (Figure 11.4 "First Page of a Typical Credit Report"). It includes the following:

• Current and past credit accounts (credit cards and store charge cards)
• History of balances and credit payments
• History of late or missed payments
• Inquiries into your credit status (e.g., if you’ve applied for a number of credit cards, this is recorded even if you did not receive the cards)
• Bankruptcy or mortgage foreclosure proceedings

All this information remains in your credit report for up to seven to ten years. What you do today can really come back to haunt you!

Figure 11.4 First Page of a Typical Credit ReportAmerican DataBank, “Trans Union Sample Credit Report,” http://www.americandatabank.com/trans_report.htm (accessed July 15, 2010).

Applying for Financial Aid

For financial aid administered by your college, often only one general application form is required, along with detailed information on your financial situation (and those of your parents or guardians, if you are receiving their support) provided by filling out the FAFSA (Free Application for Federal Student Aid)A detailed financial application form including a college student’s (and often his or her parents’ or guardians’) detailed financial information such as income; required by almost all U.S. colleges as part of applying for financial aid.. If you have not already done this application, learn more at http://www.fafsa.ed.gov. Virtually all colleges require the FAFSA.

Outside loans and scholarships are generally applied for separately. Follow these general rules to ensure you receive any aid for which you are qualified:

1. Apply to your college for financial aid every year, even if you do not receive financial aid in your first year or term. Your situation may change, and you want to remain eligible at all times in the future by filing the application.
2. Talk to the financial office immediately if you (or your family) have any change in your circumstances.
3. Complete your application accurately, fully, and honestly. Financial records are required to verify your data. Pay attention to the deadlines for all applications.
4. Research possible outside financial aid based on other criteria. Many private scholarships or grants are available, for example, for the dependents of employees of certain companies, students pursuing a degree in a certain field, or students of a certain ethnic status or from a certain religious or geographical background, and the like.
5. Do not pay for financial aid resource information. Some online companies try to profit from the anxieties of students about financial aid by promising to find financial aid for you for a fee. Legitimate sources of financial aid information are free.

Scholarships and Grants

Scholarships and grants are “free” money—you do not have to pay them back, unlike student loans. A scholarship is generally based on merit rather than demonstrated financial need—based on past grades, test scores, achievements, or experiences, including personal qualifications such as athletic ability, skills in the arts, community or volunteer experiences, and so on. Don’t make the mistake of thinking scholarships go only to students with high grades. Many scholarships, for example, honor those with past leadership or community experience or the promise of future activities. Even the grades and test scores needed for academic scholarships are relative: a grade point average (GPA) that does not qualify for a scholarship at one college may earn a scholarship at another. Never assume that you’re not qualified for any kind of scholarship or grant.

A grant also does not need to be paid back. Most grants are based on demonstrated financial need. A grant may be offered by the college, a federal or state program, or a private organization or civic group. The largest grant program for college students is the federal government’s Pell Grants program (Figure 11.5 "Student Grant Programs from the Federal Government"). Learn more about Pell Grants and other scholarship and grant programs from your college’s financial aid office or the online resources listed later.

Figure 11.5 Student Grant Programs from the Federal GovernmentFederal Student Aid, “Federal Student Aid Grant Programs Fact Sheet,” http://studentaid.ed.gov/students/attachments/siteresources/Grant_Programs_Fact_Sheet_04_2009.pdf (accessed July 13, 2010).

Student Loans

Many different student loan programs are available for college students. Because many colleges do not have sufficient funds to offer full grants to students with financial need, financial aid packages often include a combination of grant and loan money. Ideally, one would like to graduate without having loan balances to repay later on. However, almost two-thirds of full-time college students do need student loans to pay for college. The amount of money students borrow has risen in recent years because tuition and fees have risen faster than inflation. The total amount owed now averages over $20,000 for students at four-year colleges and over $10,000 at two-year colleges.

Unfortunately this is a necessary reality for many students. For most, graduating from college owing some money is preferable to not going to college at all. With smart choices about the type of loan and a structured repayment program for your working years after graduation, there’s no reason to fear a loan. Just remember that the money eventually has to be repaid—it’s not “free” money even though it may feel that way while you’re in school.

All student loans are not the same. Interest terms vary widely, and with most private loans the interest starts building up immediately. The best loan generally is a subsidized federal Stafford loanA type of federal college student loan that does not begin accruing interest until after graduation.. “Subsidized” in this case means the interest does not begin on the loan until after graduation. If you borrowed $20,000 over four years and interest accrued during this time, you could owe as much as $25,000 upon graduation. Be sure to talk with your college financial office first about getting a federal subsidized Stafford loan. Since the current maximum of this type of loan for most students is over $30,000, you ideally should not have to consider other types of loans—if you qualify for the Stafford with demonstrated financial need.

Work Study Programs

Work study programs are the third type of financial aid. They are administered by colleges and are a common part of the financial aid package for students with financial need. You work for what you earn, but work study programs often have advantages over outside jobs. The college runs the program, and you don’t have to spend valuable time looking for a job. Work study students usually work on or near campus, and work hours are controlled to avoid interfering with classes and study time. Work study students are more engaged with the academic community than students working off campus.

Some students who enter college already working or who have special skills or job experience can make a higher hourly rate than a work study program pays. If so, you might make the same income working fewer hours, leaving more for studying and other college activities. If this is your situation, carefully weigh the pros and cons before deciding about a work study program.

Resources

Start with your local college offices to gather information about financial aid. Do additional research to make sure you’re considering all available options. Even though this takes some effort, it will prove worthwhile if you find other sources of funds for your college years. Start with the online resources listed here.