Have you ever thought… “what would I tell my 18-year-old self if I knew what I know now?” My answer: 5 things I wish I had done differently in college (financially speaking).
I got my first credit card when I was 20 years old and I wish I got one earlier. Why? The earlier you start building credit the better. Your FICO score is calculated based on 5 key factors.
|Key Factor||% of FICO Score|
|Length of Credit History||15%|
If you look at the table above you will notice the weight each factor and its impact on your score. Two key factors, Payment History (35%) and Lenght of Credit History (15%) equal 50% of FICO score. Yes, 50%!!!!!!!!!!! So the earlier you start building credit the better. Bottom line, a longer successful Payment History (assuming you never missed a payment) and a longer Length of Credit History equals a higher FICO score. Check out the post on Building Credit and Credit Card Best Practices to learn more about credit cards and how to strengthen your FICO score.
The idea of student loan debt never crossed my mind when applying for colleges. While in college the idea of paying off my student loans never crossed my mind either. After graduation, I started to get more and more into personal finance and realized how interest rates have a huge impact on loans. If I knew what I know now I would have shopped around for the lowest interest rate possible to reduce the total amount owed. Even an interest rate reduction of 1% can make a big difference when it comes to student loans, saving me thousands. I would have also looked for loans that don’t accumulate interest while attending school and only start to collect interest after graduation.
If I started paying money towards my student loans while in college I would have reduced the amount of interest paid over the life of the loan. How? Simply paying down my principal (even in small increments) reduces the amount of interest accumulated. For example, if I have $1,000 loan with a 5% interest rate, I will accumulate $50 at the end of the year in interest. If I got my principal down to $900, with a 5% interest rate, I would only accumulate $45 at the end of the year.
Think of this at a much larger scale. If you have $50,000 worth of student debt at a 5% interest rate, you will owe $2,500 each year accumulating $10,000 at the end of 4 years. When you graduate your total debt owed is now $60,000. If you worked the summer leading up to your first year of college and paid $2,000 on your student loan your principal is $48,000. At 5%, your interest accrued each year is $2,400, accumulating $9,600 in interest, saving you $400. Each summer if you paid off an additional $1000, that $400 savings could turn into even more savings.
The first excuse you will when talking investing is “I didn’t (don’t) have any money when I was in college”. I’d argue that almost everyone had a job during the summer. Why not stash some of that hard earned cash into some investments? Today there are zero to low-fee investment accounts to enable folks with limited money to start investing in the stock market. If I knew this, I would have invested in individual stocks with Robinhood and index funds Acorns (no fees for students). Who cares if it is a little bit of money, the power of compound interest is pretty incredible. Check out this post, on low costs brokerage accounts for more information about Robinhood and Acorns accounts.
Investing in real estate as a college student is one of the hardest strategies to implement but can generate the greatest reward. Every student living on campus or off-campus (not in your parent’s house) pays rent so there’s a big opportunity. If I was back in college I would have done whatever I could to purchase an investment property. I would have lived in it while renting out the additional rooms to my roommates. Their rent checks would pay the mortgage and potentially create positive cash flow on the investment each month. After graduation, I would move out and turn it into a true investment property building wealth and assets right out the gate.
If you have any additional things you wish you did differently, let me know if the comments. I’d like to hear what others think.