As students leave home for the first time and head to college, they face an exciting yet intimidating period of making their own financial decisions. Whether students are ready is the big question George Washington University’s Global Financial Literacy Excellence Center (GFLEC) has spent the past decade trying to answer.
According to GFLEC’s research, just one in three adults are financially literate, meaning they know of at least three of four benchmark concepts in financial decision making: interest rates, interest compounding, inflation and risk diversification. A lack of such knowledge can lead to poor savings, bad spending habits and ignoring the importance of things such as retirement contributions and stock market investing. But on the flip side, a basic understanding of these concepts can set students up for success at an early age and help them build a foundation for a strong financial future.
To provide GW students resources as they start their independent financial journeys, renowned expert and GFLEC Founder and Director Annamaria Lusardi, who is also a GW University Professor, offered seven broad financial tips for GW students as they begin a new academic year.
University Professor Annamaria Lusardi. (Contributed photo)
Lusardi, who teaches courses on personal finance in the spring term, wants students to remember that the reason to take care of your personal finances is to “achieve their dreams.”
Here are Lusardi’s seven tips:
1) Dedicate time each week to your personal finances. It does not have to be a lot of time; even 15 to 30 minutes can be enough. In the same way that you make time to exercise regularly, you should make time to take care of your personal finances.
2) Make sure you have a buffer stock of saving, also known as a rainy-day fund. Things can always go wrong, so you want to be prepared for unexpected expenses, small accidents and other shocks.
3) Have the best possible credit score. This score is your financial identity, your financial GPA. You maintain a good score, for example, by paying your bills on time, not maxing out your credit cards and being financially active as soon as possible, as your financial history matters. A good credit score will give you better interest rates, so over your lifetime, a good score can save you a lot on interest payments.
4) Manage your debt wisely. Today, many people start their economic life in debt, often with student loans, and there are many more opportunities to borrow than to save. Debt can be expensive because of the high interest rates charged, for example, by credit cards and remember that, if you have a poor credit score, the interest rates on your debt will be higher.
5) Learn to invest because investing is critical to making your wealth grow. When investing, it is important to diversify (“do not put all of your eggs in one basket”) and to pay attention to costs and fees associated with investing.
6) Plan for the future, including your retirement and other future goals. The future does not take care of itself, so you have got to lay the groundwork to build the future you want.
7) Take advantage of opportunities to save that are offered by employers and the government. If your employer offers a 401(k) and a match, take advantage of it because it is a great way to quickly increase your savings. Other opportunities are tax-favored assets, such as traditional IRAs or Roth IRAs, which make it easy for you to save.