Finances and You by James Michael Moody, Kennesaw State University Senior Accounting Major & former Student in KSU 4401: Senior Seminar, Summer 2011
Finances and You by James Michael Moody, KSU Senior Accounting Major & former Student in KSU 4401: Senior Seminar, Summer 2011.
James Michael Moody is an Accounting Major at Kennesaw State University.
Finances and You
The term finance is very familiar, however many of you may not fully understand your finances or how they should be managed. Your finances are the most important things in your lives; healthy finances provide healthier and more stable lives, whereas poor finances create to stress and tension and can lead to instability. Because many of you may not know how to manage your money and debt, your finances are one of the biggest stressors in your lives and, unfortunately, of all the things learned throughout your college careers, how to manage personal finances is not one of them. Therefore, to help eliminate some of this stress, in this section we’ll be discussing money, credit cards, debt, credit score & history, and investments.
Cash or credit?
The question comes up, “Which is better paying, cash (or check) or credit?” Well, there’s no easy clear cut answer to this because it is all based on the individual and their ability to pay off credit cards each month. Many new credit card holders see the new immediate funds that are available to them, but forget that they eventually have to pay for the purchases on that card. This leads to them charging items on the card until they hit their limit and then when the bill comes they don’t worry because they can just make the minimum payment and be fine. DO NOT DO THIS!! This is a huge mistake that is going to take longer to pay off and will lead to paying more for your original purchase. Let’s assume that you charged $1,500 on your new credit card that has an interest rate of 18% (not too bad for someone with little or no credit history) and you make the minimum payment every month, it will take you 232 months (yes, almost 20 years) to pay it off AND you will be paying an additional $2,896.79 in interest alone. Shocked? You should be, this means that $1,500 worth of spending over 1 month has just cost you $4,396.79 over almost 20 years. So, what do you do when you really need something? Well, first analyze if you need it or just really want it, if it is not absolutely necessary and you don’t have the extra spending cash then don’t buy it, wait. If you really must have that new $100 pair of jeans, then save $10 – $20 from each check and pay cash for them with cash when you can actually afford them. Now, on the flip side, most credit cards will give a 30 day period before charging interest, so if you do charge something now and pay it off by the end of the month (or billing cycle) then you will not have to pay the interest on the card. This is only recommended if you have a system set up so that every time you make a charge you transfer (or set aside) that amount of money so that it doesn’t get spent on something else and you know you will have that money accessible to pay off the charge at the end of the month. Unless you are very disciplined this is not a good option and it would be best to only buy what is absolutely necessary and only spend what you have available in cash.
Debt
Debt and bills are unavoidable, at some point everyone has some sort of debt, whether it’s a car payment, mortgage, credit card, etc. First, don’t let the word debt scare you, it isn’t necessarily bad as long as it is kept under control and don’t let it get out of hand. So then how do you deal with debt? The best way is to create a budget by saving extra money each week and paying more on existing bills. To do this is simple; over a 3 month period calculate how much income you bring in and how much you spend. Then determine exactly what you are spending your money on and which of these expenses are necessary and which aren’t. Obviously, you can’t avoid paying a car payment or mortgage or groceries, but you can avoid eating out multiple times a week, going to the movies, going out to bars and clubs, etc. These are the expenses that aren’t necessary and that you can ultimately do without, so you’ll need to limit (ex. $25 per week in extracurricular activities) or completely eliminate until you have some or all of your debt paid down. If you are able to save $100 per month from cutting spending, then put $25 (25%) in a savings account and the remaining $75 (75%) on your debt. This additional money should first go towards your higher interest short term debt (ex. credit cards), then student loans, then car and home.
Credit Score and History
A large part of the last two sections has to do with your credit scores and credit history, these are hands down the most important part of your finances and will take the longest to build and repair. First, having no credit history is worse than having bad credit history. If you have no credit history then you have no credit or FICO score and this looks worse to creditors than having a bad or low score. So how do you build credit? Get a credit card with a low credit limit (no more than $500) with the lowest interest possible. Use this card for small purchases like a coffee, gas, oil change, etc. and spend no more than you can pay off at the end of the month, trying to keep it below $75 per month (or lower if necessary). By doing this over several months you are able to create and build a credit history and creditors will see your willingness to spend and ability to pay off your debt each month. While your credit score is largely determined based on your payment and credit history, the second largest portion is based on how much is owed vs. how much is available, which is why it’s important to keep your balances low and paid down. For example, if you have a credit card with a limit of $500 and you constantly have a balance of $400 on the card then 80% of your credit limit used and only 20% available. However, if on the same card you maintain a balance of $75, then only 15% of your available credit is being used and you have 85% immediately available. This is important because creditors want to make sure that you aren’t just collecting cards, using them, and not paying them off. PLUS, they want to see that you have this amount available and that you will have the means to pay them. A great score is anything over 750, between 700-749 is really good, 650-699 is OK, and anything below 649 needs to be improved. It is recommended to pull your credit score and history at least once a year to keep yourself updated, to correct any issues, improve your score, and discover any discrepancies or possible ID theft. Regularly check www.ftc.gov for credit updates and info and www.annualcreditreport.com for your free credit report each year, you will have to purchase your credit score, but it is $20-$40 well spent.
Investments
Because most of you probably don’t have the funds necessary to invest largely into the stock market, this will be a brief and direct section. Many of you have jobs or will soon have a job after graduation, therefore you all have, or will soon have, a way to save for retirement. A for-profit company will offer a 401K and a not-for- profit (church, school, etc) will offer a 403B as a means to help you save for retirement. My advice is to take advantage of these programs by putting in at least 5%-6% (some will match all or part of your contribution) and DO NOT TOUCH THIS MONEY. Besides having a nest egg building for the future, your contributions are made pre-tax, which means that they do not have a huge affect on your check and they give you a tax benefit when filing your returns. Unless you have several thousands of dollars in cash that you can use, then a 401K / 403B are going to be the best form of investment at this stage in your lives.
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Financial Fitness Learning Module: Degreeconomics
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Financial Management: Student Loans, Credit Cards, & Retirement Seminar by Meaghan Dominick, holds a Bachelor’s of Business Administration in Economics from the University of Georgia and is currently a Master’s Student in Financial Planning at the University of Georgia, Athens.
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