In college, you have fewer expenses than, say, your parents because you are most likely only supporting yourself. However, if you do have a child or other dependent, an emergency nest egg is even more important. Dependents or not, if you are supporting yourself through college or heading out on your own with no financial help, you have your fair share of expenses, and if you aren’t planning ahead, one little mishap or unexpected expense can throw off your whole budget.
What happens if your car breaks down? Did you set money aside for that in your budget? It’s a good idea too, but most people don’t, and car trouble can easily wrack up a significant bill.
What happens when you need to buy textbooks for the new semester? That’s not a typical monthly expense, so if you aren’t planning ahead, it’s going to take a huge chunk out of your monthly earnings.
What happens if you lose your job? You won’t have any money coming in, only going out.
If you have money set aside that is gathering interest in some sort of savings account, you won’t have to bypass a burger for ramen noodles at the end of the month if an unexpected expense or circumstance sneaks up on you.
This sort of savings is called a nest egg or an emergency fund. You should always be paying yourself and adding money to your savings, but the emergency fund is something you shouldn’t touch unless some surprise expense comes up that is going to make it hard for you to pay your bills or buy your groceries for the month.
How Much Should I Save?
You should have at least 1 month’s worth of expenses saved away. The number adopted by most financial experts is 6 months’ worth, but at this stage in your life, 6 months might be overkill. Pick whatever number between 1-6 makes you feel the most secure but is still doable.
This means that you will need to figure out how much you spend in an average month. You should do this after you have already gone through the process of cutting out unnecessary expenses from your daily life.
Monitor your expenses over about 3 months and average out how much you are spending. This is also a great way to start up a budget. Once you know how much you spend on average, you can start allotting a certain amount of that to specific expenses, like rent, bills, gas, and groceries. Then you can start trying to keep yourself below budget and save what is left over.
Once you’ve figured out how much you make in a month, you can decide how many months’ worth of expenses you want to set aside in your savings account and start building up to that amount.
The easiest way to do this is to set up automatic payments so that you don’t feel that annoying little voice tugging at your brain telling you, “This is too much money. You can’t afford to save this now. Do it next month,” every time you go to put that 5-20% of your income into that savings account.
Through your work, you may be able to set up a payroll deduction that automatically takes a percentage of your checks and puts it in savings. You can also have your bank set this up for you if you use a direct deposit for your work checks. Another way to do it is through your online banking system.
Now that you’ve learned the skills necessary to pay yourself first, and do so automatically, creating your emergency nest egg will be easy. However, there are a few different ways to save that will help you increase your savings without putting a penny extra of your own money into your nest egg once you’ve set it aside.
Ways to Save
If you’ve created a regular savings account with your bank, you are probably getting a pitiful interest rate (something like .001%). There are other ways to save that give you back a higher percentage of interest.
Money Market Account:
A money market account is like a regular bank savings account in that you can take money out of it whenever you want, as long as you don’t go below the minimum you put in to start up the account. However, it is a mutual fund, so it invests your money in government securities and bonds. The reason you don’t have to wait around for your investments to be turned over to you like with other mutual funds, is because the bonds and securities the money market account invests in are very short term, so you don’t have a long waiting period for the payout.
Since the investments are so short term, you aren’t going to make huge amounts of money, so your interest rate isn’t going to be all that large. You won’t be getting large interest sums back unless you’ve put a very large sum into the account, but some money market accounts have a higher interest rate than others and all of them have a higher rate than regular savings accounts.
Your bank probably offers money market accounts, but you will most likely get higher interest rates if you create a money market account through a financial services company such as E*TRADE or an investment company like Fidelity Investments.
There are countless companies out there. One of them will be the right fit for you. Make sure you do your research and learn about the company, their interest rates, and the minimum rate you will have to provide to start an account and find a company that suits your budget.
An easy, fast way to find companies and compare rates is www.bankrate.com. This site also helps you find rates for Certificates of Deposit (CDs).
Certificates of Deposit:
A CD is a lot like a money market account in that you give your bank a deposit that they invest in low-risk securities and bonds, but there are some differences. Firstly, your bank will give you a specific, fixed interest rate on your investment, and they will insure that rate for a set period of time, so you are guaranteed that rate no matter how the market does. Secondly, during that time that the bank insures your interest rate, you cannot take money out of the account.
Like money market accounts, the return is relatively low because the risks are low, but a CD is a great way to get guaranteed savings and growth. However, it may not be a great idea to rely on a CD for your entire nest egg because you can’t take money out whenever you want. You should at least have one month’s worth of expenses in an account you can always access.
Still, a CD is a great way to build your savings if you are the sort of person who is tempted to dig into savings for things you don’t really need, but want. Just because the money is there, doesn’t mean you should use it, but sometimes that little voice in your head convinces you that you need that new phone or laptop for work or that new coat for when winter rolls around. A CD will help keep that little voice in check.
You can also use a CD to help you build up a larger nest egg, so long as you have the one month amount already saved away. A CD can help you get a 6-month emergency fund with no extra effort.
Another stress-free way to start earning interest on your savings is to log in to www.treasurydirect.gov and let the site walk you through buying savings bonds. You can set up an automatic savings system without too much time, hassle, or money.
There are a few different types of government savings bonds to choose from:
- I-Bonds: This stands for Inflation Bonds. The minimum you put in is $25 (easy and painless if you are already paying yourself first) and you gain interest based on a combination of a fixed rate and the rate of inflation. Because your interest is based partially on inflation, you rate will fluctuate on an average of twice a year. After one year, you can cash the bond, but it is best to wait at least five years because if you cash it in earlier than that, you will lose the last 3 months of interest. This sort of bond can grow for up to 30 years, so if you are patient, with only $25 you can start creating a nice nest egg for your future! And they say all college kids do is party…
- Patriot Bonds: Also called EE Bonds, there are just a few differences between them and I-Bonds. They grow for the same amount of time and the rules on cashing them in are the same, but you get a fixed interest rate that is earned monthly and compounded (that means doubled!) every six months. Remember the son who chose the penny? Compound interest is your best friend.
The Debt Factor
Debt is scary, and it affects a scary amount of people. Most people build up their first debts in college. Credit card companies circle like vultures around 18 to 24-year-olds. You probably get at least one credit card offer every week. As already discussed in previous chapters, credit cards and their temptations get a lot of young people into debt right off the bat. Most people become indebted just for trying to get an education. Student loans must be paid back.
If you have debt of any kind, you can quickly become overwhelmed. Saving can seem pointless. Why not put that money towards those debts? Well, you should.
Student loans are large and will have to be paid off over a long period of time, but credit card debt should be attacked and eradicated as soon as possible. If you are in credit card debt, make that one-month nest egg as quickly as possible (pay yourself first and try out a money market account that you can access whenever you like), and then keep saving but start putting the money toward your debts. That way, you have some money set aside for emergencies, but you are tackling your debt. Once the debt is paid off, don’t change your habit of setting money aside, just start putting that money away in your money market account and investing it in bonds and you will be on your way to a bright future at a young age.