Taking Charge of Your Finances as a Student

As a college student, financial planning is probably the last thing on your mind. College is seen as a time for finding your passion, charting your career path and, of course, partying. But financial decisions you make in college will reverberate through your life for years, even decades.

With college costs soaring, more people are accumulating mountains of debt to pay for their education. However, that debt can affect your future in all sorts of ways — from what kind of car you can afford, how much you can save for retirement to whether you buy a home or rent. Minimizing your debt now will make life much easier once you're out of school.

Being broke can be part of the college experience, but the savviest students turn the financial pain to their advantage by learning money habits that will serve them well for the rest of their lives. "College is a great time to learn to live within your means," says Eric Roberge, a certified financial planner who runs Beyond Your Hammock and works with clients in their 20s and 30s. Even after you land your dream job, you'll still need to spend wisely and live within your means. So college is the perfect time to learn to take control of your personal finances.

Where do you see yourself in 10 years? Chances are your vision includes some degree of financial security — vacations to Europe, perhaps, or a nice car. At the very least, you'll want enough room in your budget to go out to dinner or buy a concert ticket without financial angst. As college costs have risen, so have the debt loads of young adults. The number of first-time homebuyers has fallen to a generational low as young workers find their personal balance sheets weighed down by student debt. In other words, you'll pay the price for — or reap the rewards of — today's financial decisions years from now.

Earning a paycheck is empowering, but it also requires you to think about all sorts of new financial details and legal obligations. Whether this is your first paid internship, a part-time job to help cover your college expenses or a work-study arrangement, you need to know your rights and responsibilities as a worker.

What you're entitled to as an employee:

Fair pay
You're guaranteed the right to earn at least the federal minimum of $7.25 an hour ($2.13 an hour for tipped employees). Many states — including California, Massachusetts, and Washington — impose higher minimum wages than the federal standard. Employers aren't allowed to deduct money for uniforms or other expenses that would push your pay below the minimum wage. One important caveat: It is legal for employers to offer unpaid internships.

Overtime
If you work more than 40 hours a week, your employer is required to pay you at least time and a half. Some states have their own rules on overtime pay.

A discrimination-free workplace
Federal law prohibits employers from discriminating against workers based on age, race, religion or gender.

Benefits
Depending on your employer's policies, you might receive extra perks beyond your pay. Starbucks, for instance, provides health coverage, retirement benefits, and tuition assistance to workers who put in 20 hours a week.

Some employer-paid taxes
Employers must pay part of your social security and Medicare taxes.

Once you start bringing home the bacon, you might be obliged to pay federal income taxes. If you work in a state with a high state income tax, such as California, Oregon, or Hawaii, you'll also have to factor those in. Here is what you need to know about taxes:

• After you join the working world, your employer will report your earnings to the Internal Revenue Service. When you're hired, you'll fill out an IRS Form W-4 that directs your employer how much in taxes to "withhold" from your paycheck. Your employer also will report to the IRS how much you were paid each year. If you're an employee, your employer will send copies of Form W-2 to you and to the IRS. If you're an independent contractor, you and the IRS will get copies of Form 1099. These forms, typically sent in January or February, show your earnings for the previous year. One important distinction: If you're a W-2 worker, your employer will pay part of your social security and Medicare taxes. If you're a 1099 employee, paying those taxes is your responsibility. The U.S. tax code is endlessly complicated, but if you're single, work only part-time at a low-paying job and have an otherwise-uncomplicated financial situation, the IRS might not require you to file a tax return. However, it's possible that your employer withheld more in taxes than you owe. In that case, the IRS owes you a refund, and you must file a return to claim it. You can file your tax return yourself using TurboTax or another software package. Or you can hire a tax preparer, such as H&R Block, or use your parents' accountant.

The basics of financial planning sound deceptively simple: Spend less than you earn and save for the future. Basic though this advice may be, living within your means is easier said than done. Just ask the huge percentage of American adults who say they have no emergency savings and no retirement nest egg. As a college student, you can either rely on your parents and your credit cards to fund your lifestyle or take control of your money. If you choose the latter option — which may be more difficult but ultimately more rewarding — your college years can provide a crash course in financial responsibility. Make this your mantra: Ramen now, filet mignon later. In other words, sacrifice now for rewards later.

If you find yourself running out of money halfway through the semester, it's time to take a look at your spending habits. "The little things add up," says Mark Kantrowitz, an expert on student financial aid. "A $10 pizza a week over a four-year college career is $2,000. And if you pay for that pizza with student loans, that will cost you $4,000." To control your spending, Kantrowitz urges taking a hard line on defining wants and needs. His calculus is simple, if brutal: You'll die without food or medical care, so those are clearly needs. Everything else — such as a movie ticket or a smartphone — is a want. "Cell phones are really expensive," he says. "If you truly need a phone for an emergency, you can buy a really cheap cell phone at Wal-Mart and dial 911." He also suggests tracking your spending every day. Keep your receipts or mark down each purchase, then enter the figures into an Excel spreadsheet or Mint.com every night.

Five or 10 years from now, when you have steady income and money in the bank, a credit card will be a great tool for making purchases conveniently, and for building your credit score. Now, though, a credit card can be hazardous to your financial health, if not managed properly. For unprepared consumers, credit cards come with a potentially huge downside: If you don't repay what you borrow in full every month, you'll fall into a debt trap and potentially ruin your credit score for the future. "A great goal for a student is to leave college without credit card debt," Roberge says.

Interest rates on credit cards for college students are as high as 24 percent, much higher than the interest rate on student loans. That means you pay a lot to borrow. Say you have a credit card with a 24 percent interest rate, and you charge $1,000 for a laptop and books. If you pay only $25 a month, it'll take you nearly seven years to pay down the loan — and your interest will total more than $1,000. If this scenario could apply to you, try to pay for large purchases with cash rather than plastic. "A credit card feels the same whether you're spending $5 or $500," Kantrowitz says. "Use cash for big purchases, because it's going to feel like you're spending money."

Young investors have a huge benefit: Time. Thanks to the miracles of compound interest, even a small investment each month can grow impressively. Say you put away $100 a month and get a return of 5 percent a year. Here's how much you'll have at age 40:

• If you start saving at age 18: $47,548

• If you start saving at age 30: $15,599

It's never too early to start saving and investing. However, soaring college costs may make this unrealistic for most college students. "Just because you're not saving doesn't mean you're doing anything wrong," Roberge says. That doesn't mean, though, you shouldn't try to save. Bank your summer earnings, and stash any loan proceeds or scholarships in a safe place. Try to save a little each month to build up a rainy day fund.

For most college students, student loans have turned into a necessary evil. The typical 2019 graduate owed around $31,000 - certainly a pretty penny. For many students, borrowing is the only way to pay for college. Student loans can make perfect sense; college grads earn more than those without degrees. But it's crucial that if you do borrow, you do so wisely and responsibly.

The most important thing you need to remember is that you will have to repay this debt when you graduate. Keep track of the potential monthly payment after graduation when you borrow each year. To minimize borrowing, look for scholarships, grants, and work-study programs since those don't have to be repaid. If you must borrow, start with federal loans rather than private loans. Federal loans carry lower interest rates and more generous forgiveness provisions. Compared to credit cards, student loans carry lower interest rates, and you don't need to start repaying until after you graduate.

Yes, you need insurance, and no, it's not just for old folks. Auto insurance is required by law, so that's a no-brainer. Insurance companies view young drivers as risky, so premiums can be steep. Shop around for the best deal. Using your parents' policy might help you qualify for discounts. Most auto carriers offer good-student discounts for policyholders who maintain at least a B average.

Even though navigating health insurance as a student can be tricky, coverage is another must. You're unlikely to face hefty medical bills, but hospitalization is so costly that it can be financially devastating for you and your parents. The Affordable Care Act lets you stay on your parents' health insurance until you turn 26. If you're attending school in one state and your parents live in another, check to see if your health insurer's network extends to the area where you attend school. Many schools also offer student health plans. They're typically not as generous as insurance from a private carrier, but the premiums tend to be affordable, so the plan might make sense for you.

Financial discipline
You're bombarded with advertising every day, and online retailers make it easier than ever to spend money. However, learning to spend wisely instead of impulsively is a skill you can use for the rest of your life.

Financial independence
If you blow your budget halfway through the semester, it's tempting to ask your parents to bail you out, but learning financial responsibility is an important part of growing up.

Prudent borrowing
In medical school? Your degree is an investment likely to yield a six-figure income so you can likely handle a larger debt load. However, philosophy majors may want to be more careful. "If you're going into a career as a social worker, don't go into a lot of debt," Roberge says. "It's irresponsible to say, 'I want the best education I can get no matter what it costs.'" Take a hard look at the earning potential from your degree, and borrow accordingly.

Long-term planning
Pursuing a college education means you understand the value of planning ahead. At its most basic level, college is a short-term sacrifice for a long-term gain. Now, apply that lesson to your financial life.

Lifestyle creep
When you start earning a paycheck, it's easy to forget the discipline you learned as a student. Roberge says he fell victim to "lifestyle creep" after he finished school. "You make more money, so you spend more money," he says. He soon realized he needed to keep an eye on his spending.