When you first move out of your parent’s house and into the dorms you start to get a taste of what life will be like living on your own. Part of living on your own includes taking on the financial responsibilities of adulthood. It’s essential to build the proper habits during the college years so your transition from college to adulthood goes smoothly. Five areas of finance you’ll want to have a solid understanding of are income, savings, debt, budgeting, and retirement.

Income

Hopefully, you’ve had at least a part-time job or internship, and if you have, you have a head start on understanding how income works. You never get to keep the full amount of income due to taxes, so it’s important to account for that as well as other expenses. There are different tax brackets and types of taxes depending on a variety of factors. When you eventually have a full-time job and income, it’s essential that you learn how to manage it properly.  

Savings

When you receive your first real paycheck it will probably be the most amount of money you’ve ever gotten within one week. It may be tempting to go out on a spending spree, but first take into consideration what your plans are for the future. Saving up money can help you in a pinch in case there are emergencies so you don’t end up having to take out a loan. You should also work towards monetary goals that allow you to make larger investment purchases such as buying a house or a car. Consistently setting money aside for emergencies and large goals will save you a lot of stress in the long run.

Debt

As mentioned above, savings can be a way to avoid having to take out a loan when something unexpected happens. However, most people end up having some kind of debt, whether it be school loans or a mortgage. What you need to be aware of is how interest rates affect what you owe. For example, if you have a school loan, your interest rate can add a lot of extra money to your bill. In order to lower the amount of interest owed, you’ll either have to pay down the principal balance faster or refinance to get a lower interest rate. Paying down the principal lowers your interest payments because the interest will then be applied to a smaller amount. So if you are able to pay extra on your school bills every month, your interest expenses will start to go down considerably.

Another important area of debt to understand is credit card debt. You’ll want to avoid having any sort of credit card debt if you can. The only exception to using credit cards is to use them to increase your credit score, but you will need to make sure you manually pay off the cards each month or else you will be charged an exorbitant amount of interest. If you currently have credit card debt, now is the time to start a plan for paying it off as soon as possible. If you can afford to pay all of it off immediately, that would be recommended, but if it’s too much you may have to explore other options. Since the interest rates are so high, a smart move would be to use a personal loan to pay off your credit card debt. Instead of having to pay upwards of 20-30% interest on a credit card, you can likely reduce that to single-digit interest rates which will relieve you of the heavy financial burden of credit card debt.

Budgeting

The best way to keep your money organized is to create a custom budget that fits your needs. We’ve talked about income, savings, and debt, which are all pieces that should be included in a budget. The easiest way to start your own budget is to start designing your own in Google Sheets. You can design your own columns, rows, charts, or whatever you need to keep track of your finances. If it’s too intimidating to design a budget completely on your own, there are many Youtube tutorials as well as apps specifically designed for budgeting to get you started. Once you actually plug in your numbers you’ll start to see what you’re really spending money on, and which things you could consider cutting out from your budget. Even if you think you don’t have a reason to use a budget while in college you should start now so you develop the habit of tracking your income and spending.

Retirement

An important line item to include in your budget is retirement savings or investments. The power of compound interest is undeniable and can make saving for retirement much easier. When you get a full-time job, you might have the option of creating a 401k or Roth IRA with contributions from your employer. Most of the time you choose a certain dollar amount or percentage of income to be set aside for retirement. Once you do that your paycheck will reflect the total minus the retirement contribution. Because of this, you might not feel the need to reflect this in your budget, but it’s important to do so because you might want to make adjustments to your retirement contributions later on. Make sure to start putting money away for retirement as soon as you can afford it so you can have the most gains possible.