Oct 05, 2017
Class is out, which means it's time to find ways to occupy your free time, and making some money is not a bad way to do it. But rather than using your hard-earned cash to spend on things you may want, you can use the money to get ahead of the financial game instead.
"In college, I had a few times where having an extra $100 was a lifesaver, like when I had my car towed my junior year of college," says Zina Kumok, a financial expert and blogger behind Debt Free After Three. "I had to get a friend to drive me to the towing facility where I paid $100 to get the car back. If I hadn't had that money in the bank, I would've had to borrow it from someone or use my parent's credit card for it."
Unfortunately, emergencies aren't a matter of if but rather a matter of when. Emergencies also don't just apply to a hospital visit or accidents. The reality is any unexpected expense can throw a wrench in your finances — even a parking ticket or, like Kumok, getting your car towed. That's why setting aside some money is a good idea. An emergency fund may also help you pay for school if financial aid, a scholarship or a student loan doesn't come through in time or simply isn't enough.
"At the institution where I work, students are awarded [financial aid] on a fall/spring schedule," says Jason Butler, a financial aid counselor at Georgia State University in Atlanta and founder of the personal finance blog, The Butler Journal. "If they plan on going to summer school, they either have to save some of their money from the fall/spring award or they have to pay out of pocket."
In this situation, an emergency fund could mean the difference between whether or not a student can pay their tuition bill, Butler says.
The beauty of investing is that your money can grow for you over time. This is true even if you start with small amounts and especially if you start young. This is what financial experts call the power of compound interest and it's actually quite simple. When your initial investments give you a return, that return is then reinvested and can earn you even more money. The more time you have, the more money you can earn.
"If you start investing with just $3,600 per year at age 22, assuming an 8 percent average annual return, you'll have $1 million at age 62," says Robert Farrington, millennial money expert and founder of The College Investor. "But if you wait until age 32 (just 10 years later), you'll have to save $8,200 per year to reach that same goal of $1 million at age 62."
As for where to start, Farrington suggests looking into opening an Individual Retirement Account — such as a Roth IRA — because it allows you to deposit money up to the contribution limit of $5,500 annually so long as your gross income is below $118,000 if you're single and $186,000 if you're married. The account also grows tax free until retirement.
"The great thing about these accounts is that they are typically free to open, and most major banks and brokers have no minimum account requirements to get started," notes Farrington. "Plus, you can typically invest in low-cost exchange traded funds for free, so there are really no costs to get started."
Exchange traded funds are indexes that track multiple factors of the market. For example, the S&P 500 is an index of 500 stocks made up of companies selected by economists. By investing in the index fund, you're putting a little bit of money in each of these companies.
A money market fund may also be a good option because it will likely yield a higher return than a regular savings account. This type of fund allows you to invest money in things like U.S. Treasury bills. The downside is it likely won't yield as much of a return as exchange traded funds because they are very low risk. Regardless, it may be a good place to put some of your money until you get more comfortable with investing.
"My kids are planning to pay the interest on their student loans as it accrues rather than waiting to graduate," says personal finance expert Kate Horrell, "and will use any money left over after paying personal expenses and the interest at the end of the school year to pay down the principal on their loans."
Horrell encouraged her children to do this as a way to teach them how to manage financial responsibilities while they were still in school. This will also allow them to graduate with less debt than they would have otherwise.
You too can take advantage of paying interest while you're in school. Since this approach ends up saving students thousands of dollars in the long run, using some of your summer job money to get a head start on paying your loans could be a smart thing to do.
Rather than spending all the money you earn at your summer job, consider these options to help you save some of it instead. The earlier you start taking your finances seriously, the better off you'll be when you enter the real world.