I still remember my trip from Los Angeles to Chicago to start my freshman year at Northwestern. Before I left California, I had to go out to the airport and purchase my airfare in cash. This was before you could easily buy a flight online, and I didn’t yet have a credit or debit card. Growing up in an immigrant household, cash was king, so I hopped on the city bus with a few crisp hundreds in an envelope to buy my way to college at LAX.
What I didn’t realize at the time — but did as soon as I landed — was that I had also purchased a one-way ticket to freedom. I was officially on my own. I could take whichever classes I wanted, stay up as late as I wanted to, and do whatever I wanted to do with my new friends at pretty much any time of day. The only catch was that most of those things costed money. Adulthood set in pretty quickly.
Building financial confidence should start long before college, but for many of us, leaving for school is the first time we find ourselves making financial decisions for ourselves. Here are three things I wish I had known then, so you can start getting control of your money.
1. More Expensive Does Not Mean Better
This is never more true than when it comes to your education. Whether you’re considering enrolling in a two-year program or attending a four-year school or going back for a graduate degree, investing in school can be one of the biggest time sucks and money drains there is. You might think you need an advanced degree to get ahead, but in reality you might be better off heading directly into the workforce.
Really ask yourself what career benefits you’ll get out of that degree and if those are worth the time and money. Let’s crunch a few numbers, with grad school as an example. It’s been said that by getting an advanced degree, you can make $800,000 more by retirement compared to someone with a high school degree, according to a study by the Federal Reserve Bank of San Francisco. With the average cost of a college education costing close to $100,000, according to estimates from College Board, an $800,000 return sounds tempting and maybe even too good to be true.
That’s because it is. Let’s say, instead of going back to school, you take $100,000 and invest it over the next 50 years and earn 5 percent back. You will end up with around $1.15 million. That’s a full $350,000 more than you would be making with a fancy degree.
Unless it’s required to operate in your field — like if you want to be a doctor or lawyer — go for on-the-job training instead. That’s what employers really care about. As an employer myself, I can say that what I look for in the job candidates I meet is experience, not letters after their name.
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2. Extra Credit Isn’t Just For Exams
If you want to buy a car or a home someday, you’re going to need credit. Good credit, at that. And you don’t want to wait until you need it to start building.
College is a great time to dabble responsibly in carrying plastic. Open a credit card with perks you’re actually going to use. For example, extra cash back on gas if you commute to and from campus.
To prove to creditors that you can handle paying off your balance every month — and, in doing so, build positive credit under your name — put a few steady bills on that card like your cellphone bill and utilities, and then pay them off the day they’re due each month. Many credit card companies now offer apps with push notifications to remind you when a payment is due, so no excuses.
Once you get into a good rhythm with your credit card, consider taking out a small personal loan to cover textbooks and other school expenses. Set up auto pay on this loan. You won’t miss that money as much if you never see it in your bank account.
It takes up to six months to build a FICO score. Do a good job over the two to four years most people spend in college, and you’ll be well on your way to being a creditor’s dream.
3. Save a Little, Save a Lot
I spent most of the $2,000 I got from my family and friends at my high school graduation on a laptop: one of those cool new MacBooks that came in candy colors with a handle. I spent the rest of the money on some new wardrobe items for school, of course. That meant I started college with very little money in savings — and, you guessed it, it was all in cash. Big mistake.
By the time spring break rolled around and I wanted to escape cold Chicago for a beach vacation with my friends, I was down to my last few $20 bills. Thankfully, nothing catastrophic happened, like a medical emergency or major car trouble. But the interest I missed out on by not saving during those early years was catastrophic.
Even if you’re only stashing an extra $20 to $50 per month, dumping it in a savings account can earn you 1.00% APY to 2.00% APY. A mutual fund, earning 2 to 3 percent, would be even better. You’re going to need money out there in the real world after graduation, and starting your adult life with a cushion of extra money in hand will help you to grow your future earnings even faster.
By learning these lessons the hard way, I missed out on the most magical financial phenomenon of all: compound interest. I did finally figure out how to spend and save responsibly, but I had already missed out on four good years of growing my wealth. Meanwhile, compound interest was actually working against me in the form of student loan interest, which started snowballing right after I graduated. Take it from me and heed these lessons now to ensure a more prosperous future.