By Abbey Ferguson | LTVN Reporter/Anchor
Why is a lack of personal finance skills such a common theme among college students? One of my co-workers is $800 in credit card debt. I have overheard two of my classmates joke about how they had less than $5 in their checking accounts. Even my 22-year-old brother didn’t know how to make or maintain a budget until just a few months ago, despite living independently. College-aged students need to prioritize personal finance to establish foundational financial literacy skills that can set them up for a successful future post-graduation.
College is a crucial time for understanding how to make responsible financial decisions because students are experiencing a rapid increase in independence regarding their financial management. Yet even this increase in self-determination doesn’t correlate to an increase in financial education.
An EverFi survey of 100,000 incoming college students revealed that 60% expected to take out loans for college, but only 15% said they had the information and resources to pay off those loans in the future. The survey also showed that only 59% had checked their bank account balances in the past year, and only 43% reported using a budget. According to Forbes, 87% of American teenagers admit to not understanding their finances.
This lack of financial education leaves college students in a vulnerable position — one in which they can be taken advantage of. In fact, credit card companies target college students because of their poor financial literacy and the high likelihood that they will owe interest by not paying off their statements when they are due.
While I would argue that high schools and even universities should require personal finance classes, college students can also fight back against these statistics by taking it upon themselves to gain financial knowledge and ultimately reap the benefits of doing so.
Utilizing a budget allows you to track income and expenses in an organized manner and better understand your own spending habits. Through a short-term lens, a budget can help you manage where your paycheck money is actually being spent while creating boundaries around those spending habits in a manner that best suits your financial goals. In the long term, grasping your own personal financial habits can actually benefit your relationships. In fact, one of the top reasons for divorce is financial stress. Understanding your own finances can help you have more positive conversations regarding your partner’s finances, avoiding the negativity that finances can bring to a serious relationship.
Once you have learned basic financial literacy skills, started a budget and saved a solid amount of income, it is extremely important to gain knowledge about investment accounts, specifically retirement. This is because of one main factor: compound interest. The earlier that money is invested in retirement accounts, such as a Roth IRA or a 401(k), the more time that money has to grow with compound interest. Interest accrues not only on the initial deposit but also on the accumulated interest from prior periods. On average, a student can expect between a 7%-10% return on investment per year with a Roth IRA. Of course, before jumping straight into the realm of investments, it is vital to understand the risks behind those decisions.
Personal finance should be prioritized, not procrastinated. College students have the incredible opportunity to grasp their newfound financial independence and utilize it to build a strong financial foundation. Budgeting, understanding spending habits, saving money and investing provide benefits for short-term and long-term goals. Next time that paycheck notification comes to your phone or you’re debating whether or not to buy a $5 Starbucks coffee for the fifth time that week, remind yourself of the immense importance of personal finance and at least attempt to initiate financial literacy.
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