How Good Finances Begin

By Neil Faulkner (TMFVertigo)
June 1, 2006

Fool writer David Kuo invented dry water (and I don't just mean ice) for his old university lecturer. His lecturer sold it to a major glass manufacturer for God knows how much. David got a pittance for his efforts. Still, a pittance was a lot of money to a student back in the 19th century, or whenever it was that he was at university. And he got his own back on the professor by tying up essential university resources with his small business making valves for laboratory distillation equipment.

Still, not all of us have this entrepreneurial bent, so as students we have to avoid getting saddled with massive debts through more conventional means. Unfortunately, research by the Royal Bank of Scotland reveals that 2006 school leavers may potentially be underestimating the cost of accommodation at university by £47m and the other costs of living at university by £63m.

Royal Bank of Scotland also found that a lack of confidence in their budgeting skills and exam pressure means 60% of school leavers haven't had time to consider student finances yet. But this is the time to do it! Going crazy by recklessly spending your grants and loans is like taking up smoking. It seems like a good idea at the time, but years later you regret it. Forget possessions! You can have fun and live on a budget. I'll try to explain how in a way that you teens can appreciate.

Student loans. Like, whatever

If daddy can pay all your costs, then good for you! Otherwise, the place to start for most of you will obviously be student loans. These are relatively cheap and you don't need to start paying them off until you can afford to do so.

Student bank accounts. Sweet!

Even better than student loans, you can get student accounts with interest-free overdrafts. Smile has just such an account, offering £1,000 interest free to first-year students. If you contact them each year, they should increase this limit gradually up to £2,000 by year four. Other banks offering free overdrafts include Northern Bank, Bank of Ireland and Alliance & Leicester. If you can blag more than one of these accounts, you're a Foolish student!

Savings are safe

If you're having a gap year, forget the bling bling and save! Get into the savings habit now with a savings account, or even a cash ISA. At present, ICICI (no, that's not new text-speak, it's a bank) has the best easy access savings account rate of 5.15%. If you pay income tax, you'll lose a good chunk of savings interest to the government. To avoid this, you could get a cash ISA from National Savings And Investments with a 5.05% rate of interest, or from Yorkshire Building Society for 4.9%.

Credit cards. Don't go there, girlfriend!

As a student, banks are going to shower you with credit cards. But don't take them! It's not free money. In fact, it's very expensive money in the long run. Credit cards are costly as it is but, as a student, you'll find it impossible to get the best deals, so your debt interest will mount up even more quickly. Think of credit cards as debt cards. If you start out with this attitude, you'll be sorted.

Budgeting is mint!

Just like I wouldn't patronise a clappin' old Fool by telling him how to budget, I shan't patronise you young Fools by telling you how to get cheap booze. You'll learn that by yourselves. It's a student instinct.

But you should learn how to budget now, because most people learn too late. You'll find that, when you start getting your own money, you quickly lose track of where it's all going. Before you know it you're exceeding overdraft limits and increasing your debts.

Budgeting is simple. You write down all your expected income: money from parents, grants and loans. Then you write down how much you expect to spend on food, beer, clothes, accommodation and every other expense you can think of. Break this down into a sensible weekly budget.

Don't be shy, ask your parents if they'll be giving you any money: how much and how often. Say you're not pushing, but you'd just like to know so that you can plan your budget. Hopefully they'll respect the mature way you're handling upcoming financial independence, as years ago they probably failed to budget themselves. If they're particularly pleased with your attitude, they may even give you more money!

Get a job, loser!

When you're done budgeting, you'll probably find you need a job, realistically. Paying for things with your own money is more rewarding, less stressful and will leave you much better off in the long run, as you don't play catch up paying off loads of debt plus interest. You achieve true financial independence, and you'll be in a great position to start saving and investing for a richer future as soon as you leave university.

Whatever minger!

> Compare savings accounts, check out our money saving tips and student finances discussion board.