5 tips to help students avoid financial debt

A person calculates their budget. (Mikhail Nilov/pexels.com)

Graduating from high school and moving on to college or university is a huge step towards adulthood for teens - and it’s not without its stressors, one of which can be money.

Some of the worries students have include knowing how to set up and stick to a budget, affording essential expenses, paying credit card bills and the cost of enjoying social activities.

According to a survey conducted by TD, only 15 per cent of young people in post-secondary education consider themselves to be financially stable.

In fact, nearly 90 per cent say they feel anxious about money, and parents have admitted not fully understanding their child’s real financial situation.

“Although 90 per cent of Quebec students say they experience financial stress, only 74 per cent of parents are aware of this,” the survey finds. “Barely 20 per cent of parents consider budgeting to be a cause of stress for their child.”

Additionally, nearly 50 per cent of parents say they don’t know if their child has access to credit, despite 81 per cent of students having a credit card.

Here are a few tips to help you, or a young adult in your life, take charge of their finances:

Make a budget

This is no trade secret: to understand how much money is coming in and going out of your bank account, you must make a budget.

It’s a good idea to start thinking about this before you begin your journey into post-secondary education.

Having said that, incomes can vary due to the potential instability of student jobs, and young people should adapt their strategies accordingly, says Carl Vignola, a district manager at TD Bank Group.

He recommends following the 50-30-20 rule of thumb: 50 per cent of your annual income is used to pay essentials, 30 per cent for wants and 20 per cent for savings.

“Even if you’re a student and don’t have much money coming in each year, it’s very important to consider that one day you may want to buy a property or make a major purchase, so you should set aside some of your income for unexpected expenses and future needs,” Vignola tells Noovo Info.

If you have a variable income, you may want to consult a financial professional.

A student’s financial situation may also be very different depending on whether they live at home with their parents or pay rent for an apartment.

On average, you should expect to spend $8,000 if you live at home and $22,000 if you live on your own.

“The difference is huge and can mean the difference between finishing your studies with a burden of debt or finishing your studies with some savings,” noted Vignola.

Shortfall or surplus?

Once your budget is established, you’ll be able to determine whether you should plan for an end-of-year shortfall or surplus.

“Of course, there are lines of credit for students that are structured to help them not give up on their studies because, as I often say, education is not an expense, it’s an investment,” said Vignola.

If you must take out a line of credit, you will inevitably have a greater financial burden to manage at the end of your studies.

Having said that, Vignola insists that good financial planning should allow you to remain prepared.

What about savings?

It is “always possible to save” even if you have a lower income during your studies, says Vignola.

“It depends on how much money you’re willing to sacrifice so that the money you put into your savings is money you wouldn’t normally spend on your desires,” he explained, stressing that one place students won’t be able to cut is essential expenses.

That means potentially sacrificing money spent on travel, restaurants or other activities.

To simplify your savings plan, Vignola advises automating the deposits.

There are two main ways to do that: set aside a certain amount systematically if you have regular income, or set reminders when large amounts come into your account.

Manage your credit cards

It is essential to understand the impact that credit cards have on your credit score, which is reviewed by agencies ahead of future projects.

“The factors that have the greatest impact on a positive or negative score, which represent 65 per cent of our credit score, are repayment history and credit usage,” explains Vignola.

Your use of revolving credit, which does not have a fixed number of payments, may also be evaluated.

“With a line of credit, you have a variable balance,” he said. “When you maintain a balance that is high in relation to the limit, credit rating agencies see this as excessive use and will tend to lower your credit score.”

A good approach would be “to use revolving credit, including credit cards, at no more than 50 per cent of the limit,” Vignola said.

If you are approaching your limit every month, it may be due to overspending or the limit being too low.

Start the conversation

The best way to understand where you stand financially is to simply start having those difficult conversations.

It’s the only way to gather the right information and make a real difference.

“At the dinner table with family, parents, trusted individuals, or financial specialists in the banking industry,” said Vignola. “The use of a credit card can completely change someone’s financial situation.”