Common Financial Mistakes College Students Make
College students are faced with the task of living on their own for the first time, pursuing an education, and making tough financial decisions. With all of these new responsibilities, many college students end up making pretty big financial mistakes.
While college is a time for personal growth and exploration, many students find themselves developing poor financial habits. To make matters worse, these financial decisions can follow students for decades after graduation.
Here are 7 common financial mistakes college students make and how to avoid them.
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Not Having A Budget
While budgeting can definitely be intimidating at first, it is a critical tool to manage your finances.
Many college students do not have any type of budget in place. Pair this with a low student income and you have a recipe for overspending.
If you don’t set up a budget, you are much more likely to spend more than you have.
How to Start A Budget
When creating a budget as a student, it is important to start by tracking your spending. Many students have variable incomes, so it's critical to keep a close eye on spending when you are in college:
Look through your bank account and organize all transactions from the last 30 days into categories. Common categories are housing, food, entertainment, clothes, books, school supplies, etc.
Determine the total amount spent in each category and decide on areas in which you can cut back on spending.
After you have identified your spending habits, it’s time to track your income! Calculate all of your monthly income (including grants and scholarships) and add it up.
With a zero based budget, you want to ensure that your income minus expenses equals zero. This does not mean you have to actually spend all of your money coming in, but you should assign each dollar to a place between saving and spending.
If you need to make more money to match your expenses, then it’s time to get a job or apply for additional scholarships.
Review your budget at the end of each month and make any changes necessary for the next.
Not Establishing Wants vs. Needs
This is a huuuuge issue for a lot of college students.
When I first started college, I would pretty much buy whatever I wanted with little regard of whether or not I needed or could afford it.
What is a Want vs. Need?
A need is something required to survive (food, housing, utilities), while a want is something that is nice to have (new clothes, accessories, gadgets, etc.)
When you’re living on your own as a college student, it’s easy to get swept up into the latest trends and fashions. While it’s okay to want trendy things, I promise you don’t need to have the latest dorm room decor and clothing styles.
If you know there is a want that you would like to purchase, make sure you have budgeted or created a sinking fund for it. When you have not established wants vs. needs, it makes it much easier to spend impulsively.
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Spending with Credit/Debit Cards
It is a lot easier to spend money when you are paying with a card instead of cash.
Why? Because it’s more painful to part with cash than swipe a card.
While you are still paying with money you have on hand when using a debit card, swiping a card removes the emotional attachment to the money being exchanged. That leads many buyers to spend more than they intended.
Now let’s apply this same idea to credit cards...
Studies show that shoppers are willing to spend up to 100% more on a purchase when they are paying with a credit card.
Not only does swiping a credit card make the purchase less emotionally painful, it also postpones the time that we need to think about the purchase. Since we don’t have to pay for a purchase made on a credit card right away, we are more likely to spend beyond our means.
According to The Balance, 1 in 5 college students leave college with over $5,000 of credit card debt, and 1 in 10 students leave with over $10,000! These students have not only overextended themselves financially, but are also losing money on compound interest.
Credit card companies actually target college students because they tend to be less financially literate, have long credit lives ahead of them, and are more likely to be bailed out financially by their parents.
To combat the urge to overspend, try paying with cash. Paying with cash will help college students stay aware of the cost and value of their purchases, and help them avoid financial mistakes like racking up credit card debt.
Spending Too Much on Food
Did you know that the average university meal plan is $4,500 per year?
Yikes.
If you live off campus, you can save a lot of money by packing a lunch instead of spending money on a meal plan. If you budget $200 a month for groceries, that would only be $1,600 total for the average 8 month academic year.
It’s also important to be mindful of restaurant spending. The average restaurant meal costs $13, which can quickly add up.
It's okay to go to a restaurant from time to time with your friends! Just make sure that the majority of meals are cooked at home and restaurant trips are included in your budget.
Buying Because of Peer Pressure
One of my favorite ideas by Dave Ramsey is to stop keeping up with the Jones’ because they are broke.
The same goes for college students.
Just because your friend redecorated their apartment or got a new wardrobe does not mean you should do the same! How do you know that their parents didn’t buy everything for them, or that they didn’t purchase it on credit?
Don’t buy something just because you want to keep up with appearances.
Dropping or Picking the Wrong Classes
The average cost per credit hour for an undergraduate degree in the United States is $594.
One of the big financial mistakes made by college students is enrolling for a class you won't complete. If you drop a class after the refund deadline or realize that it doesn’t count towards your degree, then the cost of that class was for nothing.
Check (and double check) your class schedule with your academic advisor. This way, you ensure you have enrolled in the correct courses for your degree program.
Excessively Taking Out Loans
For a lot of students, taking out student loans is the only way they are able to afford their education. While I am absolutely an advocate for doing everything you can to avoid student loans, sometimes they are a necessary evil.
With that being said, student loans should be avoided at all cost (especially private loans!!). Before taking out any loans, you should exhaust all financial aid, scholarship, and grant opportunities. If you need to take out student loans, make sure you fully understand its interest fees, terms and conditions, and repayment options.
Once the loan has been dispersed, it should only be used to pay for tuition and fees. College students should do everything they can to work a part time job or a side hustle to pay for living expenses.
Do not, I repeat, do not use your student loans to pay for college parties or vacations.
Trust me, you will kick yourself for how much money you could have saved later on if you do.
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