University Student Starting Fresh

[CosminDZS]

Greetings everyone, I'm Cosmin and I'm 19 years old and recently starting my university career next year in a STEM field at the University of Waterloo. My tuition rates are pretty high due to being in a co-op program. Over the summer I've been pouring myself over how to fix myself a financially safe and successful future. I have financial aid from my parents towards tuition (willing to pay for half of it) and I work a full time job over this summer (11/hr). Here are some notes I've jotted down as regards to a plan for the upcoming year:

- reach tuition goal by September ($3600)
- have a minimum of (500$) in savings with a max. goal of (1000$)
- don't touch those savings
- commute to school via public transit
- cancel phone plan (a whopping 60$ a month)
- sell game systems (+300$)
- buy used textbooks and only essential school supplies
- limit spending cash to 20$ a week
- limit going out to once a month

That's all I could think of from the top of my head. I won't be working during my Fall term at school due to fear of it interfering with my grades. This way, I won't have a steady income, but if all goes well, I will take a part-time job over the winter term. I still live at home so things like groceries and rent are of no concern to me yet. My long term financial goal (3-4 years) is to have savings of atleast $10000 to set me off once I move out  after my education is over.

What suggestions would this community have for somebody starting off my age? When should I even begin worrying about investing or putting my money where it can grow? I have no credit card yet, so when would it be a good idea to get one? How can I avoid debt all together?

[matchewed]

I think you're taking the right steps. You're moving towards optimizing your expenses while focusing on what is important to you. I wouldn't worry too much about where you're investing. Take your time to learn about investing when you can in order to figure out which of the variety of things you can invest in you actually want to invest in and will work for your overall financial plan. If you need it liquid and safe for the next 3-4 years a savings account is just fine for that. If you won't need that money for a longer time then start with learning about asset allocations and investing and choose appropriately for your plan. Feel free to get a credit card if you want to build up credit but don't view it as free money. It is still money that you spend just delayed.

How do you avoid debt. Spend less than you earn.

[SunshineGirl]

Hello,

I'm impressed you're thinking about finances at your age -- good for you.

My advice: University is about more than just school. It's about exploring interests and finding new ones, meeting new people and building new relationships, etc. As such, I wouldn't recommend limiting how much you go out, or canceling your phone plan. University should be work hard, play hard, and it seems like you're only focusing on the work.

If you can manage to graduate from college with little to no debt, you're doing great. Try to travel or study abroad during your time at the university, too -- and I would say get very involved in a few activities.

[CosminDZS]

Matchewed:

Regarding building Credit, if I were to be using a credit card, should it be more towards small purchases? Should I keep my payments as low as possible and is paying credit card payments early better than on time?

SunshineGirl:

Thank you, I appreciate the comment. In regards to the cellphone plan I will be canceling my own to join up with my parents cutting the fee to half for 30$ a month in a group plan. I will still be involved in extracurricular activity at school ofcourse, my main concern is working while studying.

[chicknelump]

Hello,

I'm impressed you're thinking about finances at your age -- good for you.

My advice: University is about more than just school. It's about exploring interests and finding new ones, meeting new people and building new relationships, etc. As such, I wouldn't recommend limiting how much you go out, or canceling your phone plan. University should be work hard, play hard, and it seems like you're only focusing on the work.

If you can manage to graduate from college with little to no debt, you're doing great. Try to travel or study abroad during your time at the university, too -- and I would say get very involved in a few activities.

I was just coming into say that. Especially since you are commuting from home, you will be missing some of the full experience of being at university. Set yourself a limit, but be reasonable.

For phone plans, check your local school computer/book store, they should have student cell phone plans available which are usually cheaper.

Also, don't forget to look into bursary and scholarship opportunities.

[Cwadda]

I'm a year older than you. I pay for half of everything as well. The difference is that my parents loan me my half at 0% interest and wish to be paid back later (when retired). I take on $13k/yr in debt from them and will end up with about $40k in debt. My goal is to graduate debt free but that's really going out on a limb. Your tuition isn't too bad and you're living at home which cuts out room & board altogether. Just make sure you enjoy the college experience. Get involved, meet lots of people, and have fun.

Here are some things to consider:

-Have you applied for federal financial aid, work-study, scholarships, etc? You may be eligible to work in a lab for work-study funds toward your tuition. If you can do that, then it's a double-win - experience and money! As to getting in the lab/research, hit the ground running. Ask if your professors or TAs are looking for any assistance. Read up on their research and show a genuine interest in their work.
-If you're interested in starting investing right away, it's possible. Open up a Roth IRA. This is a tax-sheltered account especially good for people our ages. Start to learn about investing. http://jlcollinsnh.com/stock-series/
-If going out means going out to bars, restaurants, clubs, etc, then consider getting your own alcohol and just chilling with people in - it's much less expensive. If going out is something you have planned for once per month, make sure you go out AT LEAST once per month. It helps to have fun when you're studying all the time. I find it almost necessary.
-Since you're on here, I assume you know of credit cards and the dangers they can bring. I got a credit card about half a year ago. It's handy. Just make sure you always pay the FULL balance. I think it would be a good idea for you to get one since it builds credit - if you're not taking on any loans then it helps to build credit early. It's not the amount of money either. You can put $10/month on a credit card and it would still build credit! Look for a credit card with rewards, too. I went with Bank of America Cash Rewards. I think it gives you $100 if you spend $500 in 3 months (books!).
-I found that the busier and more involved I was the higher my grades would be. This isn't true for all people, but it works well for me!

A lot of people say I have changed since college...in a good way. College is a time where you can truly be yourself without having stupid high school social expectations hanging over you; use this time to discover who you are. I can't exactly give more details than that but you will see for yourself.

[CosminDZS]

Thanks for the thought out reply Cwadda, I appreciate to hear somebody is in a similar boat. Is there any other reading materials you would suggest on investing and personal finance? Have you taken up any investing endeavors and how are your savings coming along? Do you find that you will make your intended goal or at least approach close to it? My parents are taking on the debt for me which in turn will mean I will have to take on the debt as well in the future, by assisting them to pay it off. Would continuing saving in a regular savings account put me on the right track?

[matchewed]

Matchewed:

Regarding building Credit, if I were to be using a credit card, should it be more towards small purchases? Should I keep my payments as low as possible and is paying credit card payments early better than on time?

I use credit cards like I use any money. Buy the things you would ordinarily buy without a credit card then pay off the card in full every month. Your credit will be just fine and in existence. That is if credit is a concern for you. If it isn't then there is no real reason for a credit card.

[Cwadda]

Thanks for the thought out reply Cwadda, I appreciate to hear somebody is in a similar boat. Is there any other reading materials you would suggest on investing and personal finance? Have you taken up any investing endeavors and how are your savings coming along? Do you find that you will make your intended goal or at least approach close to it? My parents are taking on the debt for me which in turn will mean I will have to take on the debt as well in the future, by assisting them to pay it off. Would continuing saving in a regular savings account put me on the right track?

Just reading the MMM blog pages can help as well as asking questions on this forum. That link is probably a one-stop guide to rudimentary investing. It's fairly simple.

I have taken up investing. I started when I first began college at 18. I put $3000 into a Roth IRA through a financial adviser. I later discovered how much I was paying in fees and moved everything over to Vanguard. You'll quickly learn that investing in low-fee index funds is the way to go. I contribute the maximum amount $5500 to a Roth IRA every year (warning: you cannot contribute more than your taxable income). I do have a checking account (I closed my savings account because the interest rate sucks and I don't want to have a minimum balance). I needed to buy a car and spent $4,000 on that. I am also going to pay $4,000 on my federal 6.8% loan and kill that for good. So that will probably drop my savings to almost nothing. After that, it's time to rebuild...I don't care about savings too much because I have a 1 day/week job during college that pays well. And I barely spend anything in college anyway...everyone's broke there lol.

Currently $11,500 in Roth
$2800 in savings with $3000 pending from employer

I could probably reach my goal if I didn't put money into investing...MAYBE I can reach it regardless. If my parents needed/wanted the money right away I would pay them. They'd rather have like $1000/month coming though for when they're retired. I invest and work towards the government loan in favor of paying them right now.

It all depends when you're planning to pay on the loan from your parents. If your parents don't need to be paid off right away, then I would say don't go with a regular savings account. My local bank's interest rate is .03% which is garbage. I would go with a Roth IRA. You will be making a lot more than bank interest with that. This is what the Roth does:

1. You can contribute up to $5500 per year, but not more than your taxable income.
2. You can withdraw what you contributed at any time; however if you withdraw before age 59.5, you will have to pay taxes on all GAINS. So not on your contributions, just how much it went up. There are some exceptions when you can withdrawal before 59.5 without penalty. One exception is you can use up to $10,000 to buy a house that you're planning to live in. You mentioned that you wanted to have $10,000 to get you on your feet.
3. When you are 59.5 you can start withdrawing from the Roth and everything is tax-free (which is awesome).

[Cwadda]

Here's a tool to look at a long-term investing calculation. http://www.moneychimp.com/calculator/compound_interest_calculator.htm

And here's a quick scenario for yourself:

Current principal: $1000
Annual addition: $1200 (or $100/mo)
Years to grow: 40 (which would put you at almost 60 and you can withdrawal tax free)
Interest rate: 6% minus .10% in fees = 5.90% (this is being conservative, the market usually performs better than that)
Compound interest 1 time(s) annually

Future value: $201,701.38

Obviously later in life when you're out of college you can increase contributions. Watch what happens when you do that...

One more benefit of the Roth: there is no age when you have to start drawing it down. Which means you can let it grow for a very long time without touching it.

[CosminDZS]

Cwadda:

Should a retirement savings plan like a Roth IRA be my first stop before taking on something like an index fund? How would I opt into such a thing, can I visit my local bank branch or would I need to see a consultant or an advisor? For a Roth IRA is there mandatory contributions and do you have to be employed with a steady income when applying?

[Cwadda]

Cosmin (cool name btw),

With a Roth IRA you are free to invest in whatever you want (you can buy index fund shares on your Roth). Roth IRA is just what the account classification is. Yes it should be your first step (or simultaneous step) to buying an index fund.

You can open a Roth right on the Vanguard, Fidelity, etc websites when you start investing. It only takes a few minutes. You don't need an adviser at all! An adviser or custodial account would probably just hit you with fees.

For a Roth IRA, there are no mandatory contributions and you do not have to be employed with a steady income (just remember you cannot contribute more than your taxable income. I did this and got penalized for it). There is no application. All it is is entering your info and designating beneficiaries (who gets the money if you die). The basis of a Roth is that because it is not tax-deductible, you are not getting any tax breaks at all and thus are "paying taxes" right when you contribute. A Traditional IRA in comparison, is tax-deductible but you must pay taxes when you make withdrawals later. A Roth is better for our situations because we are looking for long-term growth and we don't pay much in taxes anyway for the deductions on a Traditional IRA to be significant. When a Roth is tapped into at around 60 years old, everything is tax-free.

I will note, though, that there is a minimum starting amount to buy Vanguard index fund shares. VTSMX and most of the others require you to start with $3000. I believe the starting balance for Fidelity is also $3000. When you get to $10,000 they get converted into VTSAX which is a slightly lower expense ratio.

Do you think you can get $3000 before you go back to school?

[CosminDZS]

Cwadda:

unfortunately I'm only projecting to have $1000 come September. Do the Roth IRA's at Vanguard also have a minimum $3000 initial investment? If not I'll keep the savings account until I'm legible for application. What would be the difference between Fidelity or Vanguard?

[matchewed]

It is the fund itself which has the minimum requirements see here and here for what I mean. Vanguard's Target Retirement funds have 1k minimums. All you'd have to do is pick one that suits your AA and then when you reach that 3k level switch over to whatever other fund you want. It all depends on how hands on you want to be. Although IMO target date funds aren't any more or less hands on than maintaining your AA, an hour a year of work is nothing in the broader context of it all.

There is little to no practical difference between Fidelity or Vanguard. Vanguard primarily started with a focus on index funds while Fidelity started with traditional mutual funds that were actively managed. Fidelity still probably offers a broader swath of active managed funds but offers similar low cost index funds now. You should start perusing what type of fund you want to invest in and how much money you're going to be able to put in.

[cdngenie]

Cosmin - if you're at Waterloo, are you Canadian? If so, a Roth won't be available to you and a TFSA is likely a better option. You can still likely invest in the Vanguard or Fidelity funds though though your TFSA.

[MBot]

What are your habits/self-discipline like with money? I strongly recommend using only debit during university to track expenses. Later on you can worry about hacking reward cards erc.

As a university student, the best plan for building credit for me was to put one recurring purchase a month on it... (For me it was a charity child sponsorship) But lock the actual card away. Then absolutely no impulse purchases/food/trips can go on it. Easier than having it in your wallet and having to have impulse control.

If you don't have a recurring purchase, just use the card twice a year to purchase textbooks and pay it off right away each time.

In university, I also kept all my budget in a "savings" account through PC Financial and transferred a monthly spending budget to checking (and a little to emergency savings/Christmas travel savings)  Working a month ahead is really helpful.