Question from Carrick on Money newsletter reader Sian Burgess: I’ve got a 20 year-old son struggling to manage his money at university. Have you, or can you, recommend tips and an app for tracking spending?
Ms. Simmons works with young people to help them navigate the new economic climate with personal finance, ethical investing and small business advice.
Shannon Lee Simmons is a financial planner and founder of The New School of Finance in Toronto.
The answer: Learning to manage your money while at college or university is important for your current – and future – financial health. And if you are struggling, don’t feel bad: The struggle is real. This may be the first time you’ve truly had to budget your money. Welcome to adulthood.
If you want to graduate without a severe debt hangover, here’s what you need to put in your student financial tool kit: a high-interest rate savings account and a personal chequing account (preferably with no fees). I’ll walk you through a straightforward budgeting exercise.
Step 1. Tally up the money available to you for the next year.
Each year, add up all the money you have at your disposal to survive the next school year. It can come from savings, registered education savings plans (RESPs), grants, family help, employment, bank student loans, government student loans like OSAP and bank student lines of credit.
Let’s say that you have $4,000 saved from your summer job, $5,000 that will come from your RESP, $10,000 from OSAP that year and $12,000 from a student line of credit from a bank. If the student line of credit has to last you two years, then you only really have access to $6,000 of that line of credit annually. Therefore, the total money available to you for the upcoming year is $25,000 ($4,000 + $5,000 + $10,000 + $6,000).
Step 2: Put all your savings, grants, income from employment and student loans into a high-interest savings account when the money comes in. Do not put them into your chequing account.
What’s the difference, you ask? Well, a regular savings account pays interest, while a chequing account rarely does. That rate of interest in a regular savings account may be up to about 1 per cent, perhaps – but a high-interest savings account is like a regular savings account on steroids, offering as higher rate. This high-interest savings account will act like a holding tank for most of the money that is going to fund your life over the next year, and by keeping the money out of your chequing account, you’re less likely to overspend. Note, the money in this high-interest savings account is from savings, RESPs, grants and student loans only. Do not include money that you intend to borrow from bank student lines of credit.
Money from government and most bank student loans comes into your bank account in large lump sums and is typically interest-free while you’re in school. So, if you’ve borrowed $10,000 from OSAP, you can save that money in your high-interest account and make money from it. You don’t have to pay interest while you’re in school. That’s the beauty of a student loan.
A student line of credit, however, works differently. You borrow from a student line of credit when you need to. So, if you have access to $12,000 of a bank student line of credit, but you only need $6,000, you don’t get charged interest on the remaining $6,000, only the $6,000 that you borrowed.
The big difference between borrowing on a student line of credit and a student loan is that you pay interest on the amount you borrowed on a student line of credit even while you’re in school. If your student line of credit charges a rate of 4 per cent but your high-interest savings account only pays 1.5 per cent, for example, it doesn’t make sense to borrow money because you’re paying more in interest than you’re earning.
In our example, your high-interest savings account would have $19,000 in it from the $4,000 savings, $5,000 RESP and $10,000 from the OSAP loan.
Step 3: Calculate your tuition and book expenses for the whole year.
Figure out the major purchases you’ll need to make over the next eight months of school. It’s important to think about them now so that your January tuition bill isn’t terrifying.
In our example, your tuition is $11,000 and books are $1,000, for a total of $12,000.
Therefore, of the $25,000 available to you (from Step 1) you have $13,000 available for living expenses once tuition and books are paid for. This is your school-year spending money.
Step 4: Figure out how much you can spend each month.
If you have a fairly secure summer job position, you could plan on spreading that spending money over the next eight months of school if you are able to move back home and work during the summer. If, however, you don’t have a secure job or aren’t moving back home, you should calculate what you have available for spending over 12 months.
If you used eight months, you’d have $1,625 each month left over ($13,000 divided by eight) to pay for rent, groceries, transportation, toiletries, clothes – and fun. If you used 12 months, you’d have about $1,083 each month.
Step 5: Pay yourself a salary each month to your chequing account.
Now you know exactly how much you have each month that you can spend without threatening your tuition money and without going into credit-card debt.
Each month, you can move $1,625 from your high-interest rate savings account over to your chequing account to cover the needs you’ve budgeted for. You’ve essentially created a payday for yourself.
Let’s work out the logistics: $19,000 in the high-interest savings account less $12,000 for tuition and books leaves $7,000 in the high-interest rate savings account.
If you’re taking out $1,083 a month, this will last you for just over six months ($7,000/$1,083). Then, you’ll have to get the rest of the spending money from your student line of credit. You’ll pay yourself $1,083 from the line of credit each month to make up for the other six months.
Why is this strategy such a good approach?
You can earn some money on your savings and on your interest-free student loans while you’re in school – huzzah!
Since student lines of credit start charging interest as soon as you borrow on them, you’ll want to use them as a last resort to fund your life.
You set yourself a hard-limit budget each month. By moving your spendable money into a separate chequing account you can see clear as day when you have and don’t have money to spend.
The bottom line is that you don’t need to track every single expense if you aren’t overspending. If you’re able to live within the amount that is being moved to your chequing account each month, then you’re living within your means and all is well.
If, however, you’re still struggling to live within the confines of your budget and you have no idea where your money is going, you may want to take a look at your spending habits to see where you usually go off the rails. Be sure to use debit when you spend money as opposed to cash so that each of your transactions are tracked. That way, you have good data to work with and you can easily set up an app to help you track. Check out budgeting apps like Mint or YNAB if you need to start tracking your spending.