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There is no better time than the present for college students to assess their financial situation. As a young adult, this is the best time to also begin planning your financial future, setting financial goals and putting some money away for future use. However, before one can begin thinking about actually investing their money in the various types of investment vehicles available, one must critically think about what basic expenses they will have, or plan to have, in the near future. For purposes in this article, the “near future” will encompass the time left until graduation as well as the four years immediately following graduation. The “long term” will consist of the time in which most individuals move into the second stage of their adulthood, including marriage, a career change, a promotion or investing in a first house.

The first stage of the financial process must take place today. Individuals must begin to set goals for themselves relating to their career. Decisions about continuing your education, how many hours a week to work, settling down with a significant other or making a geographical living change must be considered today. Once again, there is no better time than the present to figure out, or at least estimate, when such life events will take place. By doing this, you will be able to predict how much money they might need at some point in the future to start making interest payments or pay for the costs of relocation. Living at home for a few years may be an option here for immediately after graduation so that money can be saved for future use. As for what future costs may occur, you might encounter graduate school expenses, insurance payments, car payments and surely clothing, food and traveling expenses. Traveling expenses could mean gas money, bus fares or train fares, all depending on your specific work or school location in comparison to their living arrangement. Clearly, there are many aspects of life that should be strongly thought about. Yet again, I must say that there is no better time than the present to be thinking about future life plans and how they will impact your financial situation.

Spend or Save
You have started to think about your goals and plans for the short-term and the long-term. Next, an effort can be made to properly use what money you currently have and what money you may be bringing in by way of a paying job. There are two things that can be done with your money. You can choose to spend your money or to save it. An assumption will be made here that everyone has daily expenses that cannot be avoided. This is perfectly understandable. However, you also have discretionary income. This is the part of your income that you truly must decide what to do with. At this stage in your life, this is the money or income that you are most likely spending on frivolous, luxurious or desirable items that could probably be avoided to some extent.

For example, regardless of what money is stored in the bank, suppose Tom is making $100 per week after taxes. His goal should always be to put a certain percentage of this money away every single time he gets paid. We will discuss later what you may be able to do with your stored away income.

Suppose Tom decides that he has a lot of expenses he cannot avoid. He expects food alone to cost him $60 per week and his gas expense will be $10 per week. That leaves him with just $30. Also, Tom must assume that miscellaneous expenses will occur, maybe not every week, but at a rate of $12 per week. That means that Tom is left with just $18 that he must decide whether to spend or save. The advice here would be to store away $12 and keep $6 to spend possibly on something like a movie. Tom sees clearly that the money is quick to leave his pocket once he cashes in his paycheck. This does not really account for living expenses, which brings me back to a point I made earlier. As bad as it may seem to most college students, it makes perfect sense to move back home after graduation and live with your parents for two or three years so that you can save money on cost of living and food expenses. It will pay off greatly in the future.

In addition, I would like to take the time to explain the difference in Tom storing away $12 out of $18 instead of saving just $6. On an annual basis, he will have stored away $12 per week for 48 weeks. The 48 weeks is assuming you don’t work holidays and have vacation time and may take time off between jobs or internships. In nominal terms, he will have saved 12 percent of his weekly paycheck, amounting to $576. Supposing Tom decided that he had better uses for his money than to store it away. If he were to only save 6 percent of that weekly paycheck, or $6, he would have accumulated just $288 for the year. Although this difference may sound only slightly important, it will be gain tremendous significance when the topic of investing your savings is discussed later on. The theory here is that the additional savings would increase the amount of interest received on investments and so the additional $288 banked would really be a much greater increase in wealth over time. The laws of compounding would be in your favor.

For now, I am going to take the time to point out some key strategies on how to save money and limit your debt. There are two things I would like to address and then relate you to a scholarly publication for additional relevant information. I am a firm believer, because of my educational studies, that rent and debt are the two biggest threats to a young person’s financial well-being. Basic research has confirmed that the majority of young people see little problem with renting an apartment or having a credit card during or after they are in college. The main belief here is that they will have plenty of years to make back those expenses via income and it will not hinder their financial goals. This theory could not be any more detrimental to the financial success of a young person than it already is.

Credit Cards and Rent
The goal in finance is to use your money to produce other sources of income. It takes money to make money and the goal of all people should be to save enough money to make the proper investments so that they can turn their money into a greater sum of money. When renting, or owning a credit card, a bad choice has been made. Renting is a pet peeve of mine because it simply means that you are throwing money away, usually for a very short term living arrangement. Moreover, when you are finished living in that arrangement, you have absolutely nothing left to show for the time you spent and the money you spent on the investment. On the other hand, suppose you actually purchased a home or a condominium for $150,000 in your late 20s. Although you may be somewhat burdened by mortgage payments in the short-term, you would have made a great capital investment that has appreciated in value over time. This investment could be sold when you are ready to move on and you would be left to take the profits. The mortgage payments would probably not look so bad when, after seven years in the home, the price of the structure and its property has appreciated to $210,000, allowing you to pay off your remaining mortgage and bank the difference.

Now I would like to move on to death via credit card. In my opinion, there isn’t a person in the world who should have a credit card. Everyone should have a debit card that automatically links to the money they have in their checking account. A person should only spend the money that they have, staying away from the temptation to buy something in hopes of making money or coming up with money in the future to pay for such an expense. A credit card is a temptation to buy unnecessary items that a person may not truly have sufficient funds for. Furthermore, if you insist on having a credit card, you MUST NEVER PAY LATE. You must never allow the credit card companies to charge you upwards of 15 percent on top of what you owe on your purchase. This is a sure way of losing money you have no right to lose. This is once again money thrown out the window that could have been otherwise saved and invested for positive future use. I would be in heaven if I was making 15 percent annually on my investments. The credit card companies love taking that 15 percent from you. Therefore, you should be absolutely ashamed to give them that extra 15 percent on top of what you owe. It is a sure way of destroying your financial health.

Investing
So now that you have been thoroughly bombarded with information on saving and properly spending, the exciting part of investing your savings can now become the topic of discussion. In today’s economic environment, it has been truly depressing that the stock market has declined for each of the last three years. It seems as if everyone has lost money and there is no better way of investing your money than to throw it in the bank and earn that silly 1 percent or 1.25 percent annual interest. However, if you do your homework and a little online research, you can quickly find out that there are better places for your money that do not compromise risk tolerance.

A good source of information is through Yahoo’s Finance page. Learning how to navigate this site may take some time, but links such as the stock screener and mutual fund screener can be very helpful in finding successful investment vehicles. An investor must always decide on how much risk they are willing to take based on the return they require. However, you must also factor in your current income and income potential to decide how much you can afford to lose. This must play a role in determining how much risk you want to take.

Let us go back to the $576 that Tom wisely stored away from his weekly paychecks for one year. Tom is not making a considerable amount of money. However, assuming he was able to save this amount for the year, he has many investment alternatives. He could invest the money in the bank, invest the money in the stock or equity market, the bond market, futures, options, or real estate. Given the fact that $576 does not go very far, the first three options are the only real options for Tom to choose from. Tom could keep the money in the bank, earn today’s 1 percent annual interest and turn $576 into $581.76. Or, Tom could invest the money in individual stocks, individual bonds, stock mutual funds, or bond mutual funds.

Given the fact that Tom does not have a considerable amount of money to invest, he would be advised to take a little less risk currently and invest in bonds or bond mutual funds. More specifically, he should be investing in government bonds backed by the power of the national treasury. There is no risk associated with investment into a Treasury Bill because the government will always pay off its debt. It controls the money supply and will never have a payment problem.

Tom’s second option then would be to invest in a multitude of investment vehicles. This is highly recommended. With the $576 in hand, Tom should keep $200 in a special savings account not to be touched, and then take the remaining $376 and invest it in different ways. Diversification is the key. Buying stocks in brand name companies is not the best way to invest. Buying different types of stock in companies of varying size across different industries is a better way. However, the best way is pure diversification in which the investor has some money in the stock market and some in the bond market.

Stock Market
In the stock market the investor should try to find solid companies with quality historical performance that are trading near or below their fair value. Fair value can be defined as a stock trading between 12 and 18 times its earnings. If a company falls below this range, it may be an opportunity to buy a stock that is undervalued. Value investing is one investment strategy that many financial analysts believe can lead to an out performance of the stock market. For more information on value investing, I refer you to “The New Buffettology,” an outstanding business publication by Mary Buffett and David Clark. This book explains in detail the value investing strategies that have made the famous Warren Buffett successful for so many years. Warren Buffett is a true value investor who has made billions by investing in companies whose stock is undervalued. I refer you also to chapter 19 of this book, which lists Warren’s 11 questions you must always ask yourself before you buy into a stock. Warren applied these 11 questions to H&R Block and LA-Z-BOY in 2000 and made purchases of their stock at $29 and $14 per share, respectively. Within a two-year period in which the market was in decline, Warren made 100 percent on his investment in H&R Block, and 50 percent on his investment in LA-Z-BOY.

Bonds
As for the bond market, purchasing is a little more complicated. However, I must refer you again to Yahoo’s mutual fund screener. This is a good way of finding bond mutual funds. You can sort for funds you find attractive by specifying criteria. I would encourage you to look for no load mutual funds, rated at a minimum of four stars by Morningstar, with low expense ratios and quality historical growth. For quality historical growth, look into the performance of the fund and see how many years it has made a positive return versus how many years it has made a negative return. For example, a fund that seems virtually riskless is Fidelity’s Intermediate Bond Fund. This fund has earned a positive return in 26 out of its 27 years of existence. The only down year was in 1994 when it lost a mere 2.01 percent. Furthermore, its worst three-year return was a gain of 4.45 percent, and its best three-year return was a gain of 15.75 percent. An investment of $1,000 in this fund in 1993 would have given the investor a total of $1,949.41 at the end of 2002.

Remember the $576 that Tom saved. Imagine if he was able to do this for two years. He would then be able to place $1000 in this fund and double his money within ten years. Furthermore, this fund returned approximately 7 percent annually. The last three years, the fund returned between 9 and 10 percent annually. People would have gladly taken that return instead of the negative returns they were getting through the stock market. Therefore, this is by no means a bad place for a conservative income-earning investment. Even in the strong economic years, this fund performed pretty well. The ticker symbol for this fund is FTHRX.

There are many ways that a young college student can build a foundation for a strong financial future. The job market is extremely tough and the stock market has not been a great place for a person’s money to be invested in the last three years. However, in due time, both of these aspects must turn around within the economic cycle. College students are urged to get a part-time job and save some part of their paycheck. Credit cards and rent are deadly. These are sure ways of eliminating money that could have otherwise been saved and invested. Now just imagine if Tom would have lived at home and cut his food cost. Assuming his food cost would have decreased from $60 to $45, he would have been able to save a total of $27 per week, or $1296 per year. That one-year difference in savings would have allowed Tom to buy into FTHRX with $2000 after year two, and still have $592 to keep in savings. Over the next ten-year period, he would have turned $2,000 into $3,898.82. Over a two year period, Tom’s additional $27 per week saved earned him an additional $2000 over a ten year period. This doesn’t even take into account the money Tom is earning, saving and investing during those ten years.

Once a decent amount of money has been stored away, students are urged to begin investing this money in a diversified and intelligent way. The bank is not the best way of accumulating wealth. Although some money must be kept there for security and liquidity purposes, the best way to accumulate wealth is by purchasing a variety of investment vehicles. This could include undervalued stocks or historically strong performing bond mutual funds. However, each person must do their homework before they can even begin this process. Research and the dedication of time is a necessity if one wants to make their money work for them.