Basic Financial Literacy for the New College Student
What is Financial Literacy, and Where Will Your Money Come From?
Financial literacy is the ability to understand how money works; how to earn it, how to manage it, how to invest it, and even how to donate it. Ways to earn money include paychecks from a job (usually part-time for most college students), money given to you by your parents for financial support, and as a gift for things such as graduation, good grades, awards, etc. Many colleges allow you to work and earn money on campus through a work study program. Other sources of income include scholarships, grants, and student loans, though loans must eventually be repaid.
Many colleges allow you to work and earn money on campus through a work study program.
Gross Pay Versus Net Pay
There are two different categories of income; gross pay and net pay. Gross pay is the amount you earn before deductions are taken out. Common deductions may include government taxes, social security, your 401k fees, health insurance fees, etc. Taxes and fees vary greatly. Net pay is the actual amount you earn after these deductions are taken out (the amount you actually keep).
Gross pay is the amount you earn before deductions are taken out.
Basic knowledge about the banking system is key in understanding personal finance. When choosing a bank, research your local banks and credit unions. You can do this by calling, going to their website, or meeting with a bank representative. Consider your needs when choosing how you’re going to handle your money, as every bank and account type has different rules and benefits. Don't stress; if your first bank or account choice doesn’t work out for you, you can always switch to another bank.
When opening a bank account, there are a few things to remember. Some banks may run a full credit report on you before opening an account, though most will still work with you even if you have no credit history. When going to set up an account, remember to take your driver’s license and Social Security card with you as forms of identification. You can begin depositing money into your account once the bank determines you are eligible.
Contrary to popular belief, most savings accounts don’t earn much interest. Once you have put back a decent amount of savings that you can put away for 6 months, put some savings into certificates of deposits, savings bonds, or treasury bills for a higher return and to keep pace with inflation. Don’t spend your savings unless you absolutely have to.
Checking accounts allow you to write checks or use a debit card to withdraw deposited money. With a checking account, the bank pays the person or business using your account balance, and sends you a monthly list of deposits and withdrawals (called a bank statement). It is wise to keep a check book, and record in it and balance it each time you write a check, use your debit card, or withdraw any money from an ATM (automated teller machine) so that you can always keep track of your account balance and expenses.
Tip: Sign up for your bank’s online program to check your balance, pay bills, and manage your money more conveniently.
Debit or Credit?
Debit and ATM cards are tied directly to your checking account, and automatically deduct money from your account with no grace period. You cannot spend more than what is in the account. Most banks offer optional overdraft protection, meaning that if you overdraw your account (spend more than what is in it), they will pay the difference for you, but will charge you an additional fee. Overdraft fees typically range anywhere from $35 to $45, sometimes more. Some bank institutions may place a hold on the overdraft amount; these holds may take up to a week.
Debit card purchases sometimes have a debit or credit option. If you sign a debit purchase like a credit card instead of using a debit PIN, it gives you automatic zero liability protection, meaning you have rights to get your money back if if the product you purchased is defective. However, keep in mind that federal law does not give you the right to stop payment; the issue must be resolved with the seller.
If your card is ever lost or stolen card, call the issuing bank IMMEDIATELY. Some banks even have mobile apps that allow you to instantly freeze your account if it is lost or stolen, prohibiting any unauthorized purchases from being made. If you report your card as missing BEFORE its used, you may not be responsible for any unauthorized withdrawals. If you dispute an unauthorized purchase, the seller already has your money; it will only be returned to you if you win the dispute.
Always pay yourself first!
Credit, Credit Cards, and Credit Scores
Credit comes in multiple forms including credit cards, bank installment loans, and store charge accounts. Your student loans are also a form of credit. Credit is very convenient, but requires commitment to paying back what you’ve borrowed, plus interest and additional fees. Many banks and credit card companies offer 30-day interest-free loans if you pay the balance in full before the end of the 30 days.
When dealing with any form of credit, there are a few things to always keep in mind. Always read the fine print. Always keep in mind that a credit history or credit report lists all accounts you have, and if you’ve paid your bills on time. Credit cards offer increased security and a reduced need to carry cash, but they also require increased responsibility. If at all possible, try to pay all credit bills in full each month.
Some important credit terms to know:
▪Interest- the cost of borrowed money figured as a percentage.
▪APR- percentage of yearly interest charged for the money you borrow.
▪Finance charge- configured based on APR and your balance.
▪Grace period- the time you have to pay your balance in full before getting charged interest fees.
▪Credit card- Card in which purchases are small loans you repay. Keep in mind that interest rates may go up, you could spend more on additional fees, and it is easy to overspend as credit cards can promote impulse buying.
▪Credit score- quick, accurate, consistent, and objective method for lenders to quantify how well individuals have managed their credit. They measure future risks; the higher the score, the greater likelihood a person will repay a future loan on time in the eyes of credit lenders.
Credit cards offer increased security and a reduced need to carry cash, but they also require increased responsibility.
Money Management, Goals, and Balancing
Always have a budget or money plan, as it helps you track your money usage. It is KEY to know the difference between a NEED and a WANT; when in doubt, ask yourself, “Do I really need this?”
The biggest goal of budgeting is to have more money at the end of the month than what you started with. Here are some great budgeting tips:
- As a general rule of thumb, live off of 80% of your income, and put rest in savings.
- Utilize direct deposit wherever possible; it pays you first, and reduces the temptation to spend money before it makes it to your account.
- When budgeting, always remember to allow for taxes, Social Security, health insurance, and other deductions where necessary.
- Always try to know your general bank balance each time you make a purchase.
- Balance your checkbook after every purchase.
- Check transactions and deposits on your bank statement each month; keep an eye out for fraudulent or unauthorized charges.
- Check out textbook options; there are plenty of websites and stores that have used textbooks in great condition at largely discounted prices.
- Be smart about your smartphone; don't upgrade to a more expensive phone unless you absolutely have to, and switch to the cheapest plan that suits your needs.
- Ditch the car; walking to class is both healthy and budget friendly! You'll be surprised at how much you'll save on fuel costs.
- Eat well and wisely; there are tons of great grocery shopping lists available online for people on a budget.
- Be careful with your plastic; cards can be TOO convenient, and are notorious for promoting impulse buying habits.
- Have a weekly budget and adhere to it.
- Financial Literacy college course notes
- Personal experience
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2019 Liz Hardin