I used to be the kind of person who could rack up credit card debt and not think twice about carrying a high balance, and who thought "pay yourself first" meant "get a pedicure as soon as you get paid." Like most other Canadian teens, I grew up not learning about basic household budgeting, so when I went to university for the first time I was a little lost. I made mistakes. I got into debt. I spent more than I had. Then I realized how hard it was to pay off debt on an entry-level salary, and I got smart about my finances.
This week I'm hosting a Twitter chat about budgeting tips for students, which is an initiative from the Practical Money Skills financial literacy site and the Jr. Economic Club of Canada as part of their Bay Street Bootcamp day camp. As I started thinking of questions for the students, I realized that I have some key learnings (read: times I failed hard at personal finance) that I wanted to share. Students of 2015, beware: these are the things you need to know if you want to avoid my mistakes and be in a great place when you graduate.
1. Always read the fine print. I got my first credit card on the first day of university, and I didn't really get the whole "you have to either pay the balance off in full or at least pay the minimum payment" thing. Fast forward to the end of first year, when I was sent to collections for a $500 balance. Always make sure to read the fine print and know what you're getting into, whether it's getting a credit card, signing up for a Rogers phone service, or opening a PayPal account. Understand the payment terms, interest rates, and penalties for missing a payment so you don't end up with creditors calling you.
2. Understand your credit score (and why it matters). Getting sent to collections didn't really mean anything to me, because I had zero clue what a credit rating was, and why you don't want a low score. The best thing you can know as a student is that you want to build your credit by doing things like opening a credit card and making consistent payments, and you want to avoid any black marks on your credit rating, which happens when you miss bill payments (yes, even Rogers bills) or get sent to collections. While a credit rating might not matter to you in first year, it will matter a lot when you apply for car loans, additional credit cards, and mortgages in the future -- a low score means you'll have to co-sign with your parents, or you'll just get a big old rejection.
3. You will not be rich when you graduate.The biggest misconception I had when I was a student was that adults are rich, and having a full-time salary means you'll be picking up the drinks tab with your friends and buying clothes all the time. This couldn't be more wrong. My starting salary out of university was $36,000, which was respectable but challenging to live off of when you live in Toronto and your rent takes up an entire paycheque. Being an adult doesn't mean you're automatically rich, and in fact you have way more bills and responsibilities when you get out of school. I stress this point to underscore my next lesson, which is...
4. Don't incur bad student debt. I was fortunate enough to not have to take out student loans when I attended university, but I did get a line of credit in my final years for expenses like rent, hydro bills, and spending money. I blew through my line of credit in a semester, not realizing that there's no line of credit fairy who just erases it, and you're stuck paying that off when you graduate. And as I mentioned in my previous point, your starting salary out of school doesn't leave you a lot of wiggle room for things like debt repayment. If you do have to incur debt, make sure it's for things like tuition and books, not for nights out at the bar, because paying off $10,000 of debt when you have about zero extra money after graduation is pretty difficult.
5. Learn how to live within your means. I still struggle with the "live within your means" philosophy daily. I get that you need to spend less than you make in order to stay out of debt, but it's hard to refuse a dinner out, night at the bar, or trip to visit your friends when you're in school. The earlier you can learn you live within your means the better though, so sit down and make a budget, even if the only things you're responsible for are your late-night pizza slices. Making a budget helps you see where your money goes, and also helps you understand if what you're spending is higher than what you have (which is why I worked through university)
6. Start saving early, even if you can't contribute a lot. The #1 thing students should be doing is opening an RRSP (a retirement savings account) and contributing regularly, even if it's only $20 per month. Why? The joys of compound interest. The earlier you start saving the longer your savings have to multiply, and if you start saving at 18 you'll be light years ahead of people like me who didn't open up an RRSP until they started their first full-time job. I don't want to be all "I'm older and wiser and know these things," but while saving for retirement is probably the last thing on your mind, getting into the habit early will set you up for success later in life.
7. Try to become a homeowner early on. Most university students rent a house in their second, third, and fourth years, usually with a bunch of roommates. When they graduate they typically rent an apartment with a roommate, like I did after I graduated. I've been paying rent since 2004, and the best advice I have for new students is to find a way to invest in real estate so you're not paying off someone else's mortgage. Maybe your parents buy a house in your university town and you rent it out to your friends. Maybe you borrow from them to buy your first place after graduation. Or maybe you just start a savings account early and have enough for a down payment by the time you're 25. Regardless of how you do it, make it a goal so you're paying off your own mortgage, not someone else's (there are lots of people who argue that renting is better than owning, so make sure you consider both sides before you make home ownership a goal)
8. Educate yourself. Unfortunately we didn't learn basic financial literacy when I was in high school, which is sad considering it's something every student needs to know. Just because you don't learn it in school doesn't mean you can be ignorant to it though, so take an interest in personal finance blogs -- some of my favourites are Give Me Back My 5 Bucks, Blonde on a Budget, and RateHub -- or read a book like The Automatic Millionaire, which was the book that changed the way I thought about money. The onus is on you to be good with your finances, so start learning now.
Those are my tips for students -- what are yours? Join the Practical Money Skills Twitter chat on Wednesday, September 2nd at 9 a.m. to chat with me and the team from the Economic Club of Canada -- use @MoneySkillsCA and @ECofCanada and hashtag #MoneySkillsCA to participate (and win great prizes). And if you're really interested in learning about personal finance come to the Canadian Personal Finance Conference in November -- I'm speaking there about personal branding, and I'd love to meet you!
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You may feel like saving is impossible with that huge pile of debt sitting on your back, but unless you take care of it first, you won't be able to plan out a clear financial future. "High debt levels will slow down your saving and investing abilities when you start working, so do everything you can do to stay out of debt," says author and financial coach David Campbell Lester. Obviously, this situation isn't ideal for everyone — especially students who take loans during the school year and don't find full-time work right away. Once you graduate, talk to a financial planner to figure out how much you should save each month, and if you're a student, talk to your school's career centre for part-time work or look for grants or scholarships.
This can either be someone who works at your bank or someone you know who is really good with their money. Meet with your mentor once a month and discuss your challenges and successes thus far in terms of your career and finances, Lester says. And although it may be a little embarrassing to share your savings and debt numbers with someone you know, remember, we've all been there at one point.
"When in school, get a part-time job that will complement your career when you graduate, and give you cash to keep out of debt," Lester says. Although getting part-time work can be tough during the school year, try looking at jobs on campus that can work around your schedule, and give you more skills in your preferred field.
If you love your credit card and treat it like a best friend, make sure you're using it for the right things."Build credit by paying your mobile, cable, internet, and other fixed costs on your credit card and then pre-authorize a full payment at the end of the month," he says. Don't make of habit of paying for everything on credit — especially if you can't pay it off. Also, when you are looking for a credit card, choose one (or two) that will benefit you with either points or a cash back feature. Credit can be your friend, as long as you don't create a hole of debt.
If you know you have $100 a week to spend on food, coffee, entertainment, etc. then leave that amount in a "spending account," or take it out in cash every Sunday, Lester says. If you are the type of person who is more likely to spend cash if they see it in their wallet, start with a small amount, like $20 to $40 per week.
Make your own coffee that day, pack your lunch, stay in and watch Netflix, and make your own dinner. Start this challenge by bringing your lunch every day, for example. Turn it up a notch by implementing financial-free weekdays at least three times a week. "Going out only once a week will save you a ton of money," Lester says.
Have your bank transfer 10 to 20 per cent of your paycheque into a savings account every time it goes in. Over time, it will grow and you won't even miss the amount. If you're worried about spending it, try opening up a separate bank account without any fees or invest in a TSFA. Remember, once you get comfortable, you can move up the percentage.
Looking into the future, start thinking about investing in property. "Real estate has gone up in the long run and there isn't a single better investment for retirement than a home that is paid for," Lester says. Although this may seem out of reach for most millennials, start saving early by putting away a certain amount of money each month for a condo or house, live with roommates to decrease your own rent costs, and keep an eye out for new buildings or units in your area.
"I know it seems boring, but once you have a portfolio of investments pumping money into your account, you'll see it as fun too," Lester says. Join an investing group, watch the news for the latest numbers or pick up some investing books from the library.
Take a minute to actually figure out where your money is, including how much money you have in each account, money you owe and money you have invested, if any. "You don't have to cut out expensive coffees, shop with coupons, and live like a hermit to be a money champ. Spend less than you make and save 10 to 20 per cent for your future," Lester says. If your net worth is increasing year after year, you're on the right track.
Follow Erin Bury on Twitter: www.twitter.com/erinbury