It’s never too early to start making decisions that will set you up for financial success later in life. When you have a long timeline to plan your financial future, it’s easier to benefit from long-range returns and recover from any setbacks. For those college students who are ready to get a jumpstart, here are five ways to start thinking about their financial future.
1. Think about how to build credit
Credit scores are important for financial success. That’s because a credit score will ultimately determine if someone can borrow money to make that first car or home purchase. In addition, those with a better score often qualify for better rates, which can help someone save thousands of dollars or more over a lifetime, The most important factors in establishing a great credit score are payment history and credit utilization.
That means college students can start thinking about their financial future by making wise spending decisions today. Opening a credit card and using it responsibly can make a big difference. Paying all bills on time and in full will lead to a more solid payment history, which may lead creditors to view people as more creditworthy borrowers in the future.
2. Plan for large future purchases
Many college students dream about the car or home they’ll buy after landing their first job. And certainly, a job paying a decent salary can afford options when it comes to these types of larger purchases. Unfortunately, those large purchases can also lead to debt.
Although some debt may be inevitable, it’s best to get in the habit of building savings so that any debt remains manageable. If you start while you’re in college, putting aside a small amount each month can build over several years to a meaningful down payment that allows for less borrowing. And that frees up spending money to do even more saving, investing, and getting ahead down the line.
3. Begin to plan for retirement
Retirement feels a million years away for a college student. But compound interest is a powerful and amazing tool that, if used properly, could make a substantial financial impact on retirement accounts.
One of the most effective retirement accounts to open young is a Roth IRA. And a college student with any earned income can open one. This retirement vehicle can help savings grow tax-deferred for eventual tax-free withdrawal, which can mean more money come retirement.
To show the impact of retirement planning early, a 35-year-old who makes $50,000 a year and contributes $6,000 a year into a Roth IRA is projected to have $578,000 in their account at age 67 (assuming a 6% rate of return). But if a young adult started making those contributions at age 22, they could have $1.35 million by age 67.
That’s over double the money from starting 13 years earlier, making it a no-brainer to begin to plan for retirement young.
4. Understand insurance options
Many college students don’t have an immediate need for life insurance. But in the coming years, marriage and a family make life insurance like a term life insurance policy an important financial tool.
A great term policy costs relatively little for a healthy young person, often just hundreds of dollars a year, but it can be used by loved ones to cover debt repayment, like student loans or a mortgage, or care for dependents when someone begins to build a family. Moreover, thinking about life insurance now means being better prepared when the time comes to purchase it down the line.
5. Seize the opportunity to learn
College is an incredible time to take advantage of learning opportunities. If courses on personal finance are offered, sign up and learn as much as possible. Since there’s relatively little financial education in the real world, taking the college years to learn as much as possible about basic financial concepts will pay dividends in the years following.
The Bottom Line
During college, sometimes it can be hard to see past the next exam. But starting to paint a financial picture at a young age means anything is possible. And great decisions now, like building credit, saving for large purchases, planning for retirement, understanding insurance, and seeking out learning opportunities, are going to position college students for later financial success.