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College Students and Recent Grads

The Importance of Paying Yourself First

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Male hand putting coin into a piggy bank

Payday: one of the best days of the month. It’s a day to pay the bills, throw money towards any debt and likely splurge on a recent purchase you’ve been eyeing. But before you put money towards your bills or hit purchase on your recent Amazon buy, consider a classic piece of personal finance advice: pay yourself first.

No matter which personal finance expert you look up to, they all have one unified message: save your money.

We aren’t ones to argue with the entire personal finance community, except we prefer you look at saving in a unique way. Instead of just tucking away the money leftover at the end of the month, you need to make saving a priority. It should be the first thing that happens with your paycheck. Here’s how:

Step One: Run the numbers

We can sense you want to argue, “I don’t have any money to save.”

Before you reach for that tired excuse, we want you to run the numbers.

Sit down and write list of your monthly expenses. Consider costs like your cell phone, rent, utilities, tuition (or student loans), any debt payments, groceries, and your “fun fund” for eating out, going to the movies or bar hopping.

After adding up your expenses, subtract your expenses from your monthly income.

Our hypothetical college student Lizzy earns $1000 a month and her expenses total to around $850 a month.

She only has wiggle room of $150 after each paycheck.

Step Two: Set a percentage

Using Lizzy as an example, she could save 15 percent of each paycheck and still have enough money left for expenses.

Except that some months are more expensive than others, so she may need some of that remaining $150 (even though she has fun activities built into her budget).

Lizzy is comfortable with contributing seven percent ($70) of her monthly income to her savings account.

This may sound like a small number, but if Lizzy diligently saves $70 a month, she’ll have $840 tucked away by the end of the year. If she continued with this practice through four years of college, she’d have $3,360 from just contributing a small amount of each paycheck (not including interest). She might even get a raise during the four years of college and be able to contribute and save more!

Step Three: Set up a savings account

Once you’ve set your percentage, you need a place to stash your cash. Your checking account doesn’t provide much of a safe haven because you may be tempted to spend the money earmarked for your nest egg. Plus, checking accounts won’t help you earn money in interest (unless you count a penny a year big bucks).

Setting up a savings account is simple. You can look into doing one with your current bank, but we recommend using an Internet-only bank. If you’re already using an Internet-only bank, color us impressed.

Internet-only banks offer higher interest rates on savings accounts than traditional brick-and-mortar banks because they save immense costs by eliminating the local bank branch. They’re FDIC insured and just safe as using your local bank.

For example, Ally has no minimum deposit to open a savings account and offers an interest rate of 1.60%. That may not sound like much, but Bank of America requires a $25 minimum to open an account and only offers 0.03% APY (annual percentage yield).

A savings account will give you a location to allow your money to earn a higher interest rate than a checking account. Plus, it’s gratifying to watch your fund grow and know exactly how much you have saved.

Step Four: Pay yourself first

Once you settle on a percentage, even if it’s .05%, start to diligently save each time you get a paycheck. Before you pay off bills or go on a spending spree, you need to put that money into savings.

Even if you can only afford $1.50 each month, you need to start getting into the habit now. The younger you begin saving, the happy your older self will be.

Don’t roll your eyes and say, “Ha, $1.50 a month. That can’t even buy me a latte. Why would I bother putting that in a savings account?”

In the beginning, it isn’t about amassing a fortune in your savings account today. This is about building a foundation for your financial future. It’s a practical way to start saving instead of randomly throwing money into a savings account when you occasionally have leftovers.

Step Five: Adjust your percentage as your budget and income change

Hypothetical Lizzy earned $1,000 a month in college and could only save $70. Once she graduates, Lizzy lands a job earning $2,500 a month, after taxes. She needs to run a new budget to account for any increases in expenses.

If Lizzy sticks with her commitment to pay herself first with seven percent of each paycheck, she’ll be increasing her savings from $70 to $175. A simple habit developed in college will result in her saving $2,100 a year (before interest).

If Lizzy runs her numbers and determines she can save more, let’s say 15 percent, she can be saving $375 a month or $4500 a year (before interest).

It’s up to you

Like any habit that’s good for you (exercise, eating the right foods, not binge watching Netflix every night), it can take time to be dedicated to saving a portion of each paycheck.

It’s okay to screw up, but the sooner you start forming the habit, the faster you can accumulate wealth.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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College Students and Recent Grads

College Grads Can Get an A+ Credit Score

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Students throwing graduation hats

Hello Graduate –

The next few months will be both exhilarating and painful. You’ll miss your friends, the ease of living in a college bubble and eventually look back nostalgically on some of those all-nighters. But instead of staying in a phase of arrested development, you’ll be able to become truly independent, establish a career, perhaps move to a new city and build a foundation for the rest of your life. Part of the foundation of life revolves around handling your finances.

Post-graduation you’ll be entering what is obnoxiously referred to as “the real world,” assuming you don’t seek protection in your parents’ basement. Finding the basic necessity of shelter will be high on your priority list. It doesn’t matter if you plan to rent or buy, your credit history and score will dictate your future.

If you spent college being financially responsible with behaviors like using a credit card and always paying off the balance or perhaps you even starting to pay off your student loans, then your credit score will probably be good (680 – 749) to excellent (750+).

Quick credit score recap

Credit scores help lenders assess your “risk factor” – like evaluating the consequences of going out drinking the night before a final. The lower your credit score, the more likely they are to think you’ll default on a loan, make late payments or jet off to a foreign country and assume a new identity. A high score (or one above 680) indicates trustworthiness.

Fair Issac and Company (or FICO) – who owns the definition and scores credit – use five factors to create your credit score:

  • Payment history (35%): do you make payments on time? Missed payments can crush your credit score quickly

  • Amounts owed (30%): the more debt you have, the lower your score. But even more important than the total amount you owe, is the amount you owe in relation to your total credit limit – which is called utilization. If you max out every card you have, you will get punished

  • Length of credit history (15%): the longer you’ve had credit, the better

  • New credit (10%): this looks at how many new accounts you have opened, and many times you have applied for credit.

  • Types of credit used (10%): the more types of credit you have, the better. So, someone who has successfully managed a car loan, a mortgage and a credit card would score better than someone who just managed a credit card successfully.

Why a strong credit score is important

When you want to rent your first place, your future landlord will most likely run your credit report and score. If you’re looking to buy, then your report and score will absolutely be run to determine your mortgage. The credit report shows your financial history including loans and credit cards as well as if you ever defaulted, missed or made a late payment. The credit score helps the landlord easily determine if you would be a good tenant. They’re probably looking for a 680 or higher.

The same goes for anyone who might be giving you a loan, like a car salesman. The higher your score the more negotiating power you bring to the table. If you’re resting in the high 700s then you’ll be able to get lower (aka better) interest rates than your peers in the low 600s or below.

Build your credit score

If you’re starting out with a low or non-existent credit score, don’t worry. We have resources to help you establish and/or build your credit score. We’ve outlined six simple steps below

  1. Get a line of credit – opening a credit card is the simplest way to begin establishing credit history.
  2. Keep your utilization rate low – utilization is the amount of your credit limit you spend each month. Aim to keep your utilization below 30 percent.
  3. Pay in full, and on time, each month – the easiest way to prove you’re responsible is to only charge what you can afford.
  4. Avoid credit card debt – by only charging what you can pay off, you’ll easily avoid the debt trap of a credit card.
  5. Your score will improve and better card options will come – once your score gets above 680, you’ll start getting offers from top-tier credit card companies.
  6. Protect your score – check your credit reports at least once a year for accuracy and signs of fraud.

For more details, visit our building your credit section.

Have questions about handling your financial life after college? Ask us in the comment section or email us at [email protected] You can always get social with us on Twitter, Facebook and Google+.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Use College to Rock Your Financial Life

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college_students11

Dear College Student –

I envy you. Not for the football games, the keg stands nor the ability to arrange your schedule for constant three-day weekends. Okay, I miss that last one. But I primarily envy you because you have a simple advantage when it comes to finances.

Time.

Over the course of your college career, you’ll make a lot of decisions that will impact the course of your life. Some of them will be academic, a few will be social, but plenty will be financial.

Before you even entered the hallowed halls of your university, you may have signed a dotted line that put your young financial life into the red. Student loans are major issue for college students – more so than actually picking a major – but we’re here to help to minimize all other debt and maximize your financial health. School may be preparing you for getting a job, but here at MagnifyMoney we want to educate you on what comes after.

Step One: Build Credit History

Grades don’t stop after you hand in your final exam, in fact you’re going to be graded your entire life. A credit score is how a lender will determine how risky you are. If you’re looking to buy a car, rent an apartment or apply for will a mortgage (lucky you), then your credit score will be pulled. A high score can help you edge out other applicants for an apartment or give you bargaining power for a lower interest-rate on a loan. The lower your score, the risker you’re going to appear.

Even your employer could end up pulling a credit report to assess your responsibility. A credit report doesn’t contain your score, but will show if you’ve been late making payments, defaulted on a loan or even filed bankruptcy.

Fortunately, you have four years of college to be building your credit history so you graduate summa cum laude – with a high credit score and impeccable credit report. If you’ve taken out student loans in your name, then you’ve already started the process of establishing credit history. However, we still recommend that you consider getting a credit card. Part of your credit score is determined by the types of credit you have as well as payment history.

A credit card is a simple way to establish credit history, but you must be using it responsibly.

  • Pay off your balance in full each month – carrying a balance just costs you more money

  • Keep your utilization rate low – only use 30% of your available credit. So, if you have $500 a month, then don’t spend more than $150 per month. If you really want an A+ in credit card use, try just spending $5 a month and have an insanely low utilization, which translates to a high credit score.

We have a list of college credit cards on our Cash Back Rewards page. You can also consider applying for a secured card, which helps you establish credit history by putting down a deposit of your own money to prove your responsibility.

Read more about building your credit history here

Step Two: Avoid Credit Card Debt

Opening up a credit card can be like walking into a frat party when you’re trying to avoid drinking. It opens the door to a whole lot of temptation, which is why it’s incredibly important that you use the credit card to only purchase items within your budget. Using it as a tool to buy expensive clothes, get the latest gadgets and open up a tab at the bar for all your friends will land you in a lot of financial pain.

Credit card companies may try to entice you to spend more by offering sign-on bonuses or cash back rewards. Don’t let this fool you into spending more than you can afford. If you get into debt, then you’ll be paying a lot more than you made from the sign-on bonus or cash back rewards. Plus, the interest rates on college credit cards are usually insanely high and that means debt at a high interest rate.

The simplest way to avoid consumer debt is to pay your balance off, in full, each month. Carrying a balance doesn’t help your credit score; it simply incurs interest you have to pay off.

Step Three: Consider an Internet Bank

You’re part of a generation reared on the rise of technology. You already know “there’s an app for that” – so why waste your time and money by banking at a traditional brick-and-mortar bank branch?

Putting your money into a savings and/or checking account is essentially giving the bank a loan. They are able to lend your money to someone else at a high interest rate while paying you less than 1%. Then they have the audacity to charge you heinous amounts of money if you go overdraft (the act of making a transaction without enough money in your account).

Now, Internet banking can help you save more money and there are, of course, apps for that.

Internet banks offer:

  • Higher interest rates on your savings accounts

  • Lower fees on your checking account

  • Overdraft fee protection and reimburse you for ATM fees

  • The ability to cash checks with your smartphone (or a scanner)

Internet banks are FDIC Insured just your brick-and-mortar bank, so they’re entirely safe.

Read more about Internet Banking here

Graduate with a Degree and Financial Competence

The next four years of your life are about so much more than good grades, parties and your cute study partner. They’re an opportunity to do the incredibly simple work that builds a foundation to pass a life-long exam. Taking the time to understand your financial situation in college will pay huge dividends once you graduate. Unless you do actually just want to live in Mom and Dad’s basement because you can’t afford anything and no landlord will take you without a decent credit score.

Got questions about setting up your financial life? Email us at [email protected] or tweet @MagnifyMoney

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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