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Last week, in the second of our weekly posts on a “lifetime of financial planning”, we discussed the importance of instilling the idea of financial planning in children. There is no denying that children who learn how to plan their finances and save money responsibly have a far greater chance of avoiding financial trouble in later stages of life. This week we examine the importance of good financial planning for students.
Life as a student is exciting. Going to university and shaping your future through study is a rite of passage full of new experiences. However after leaving university, many students find that their post-graduation situation is tainted and their futures are not as bright as they wanted them to be due to poor financial choices and a lack of financial planning.
Going to university is expensive. Tuition fees at universities in the west are expensive and rising. Tuition at a good university can range from $14,000 a year upwards and is something that is of great concern to many expatriate parents who find themselves in the position of having to pay the full overseas rate. Advanced education fee planning is the best way for them to spread the costs. However, for the average student, the main concern is coping with living costs which can be up to $20,000 a year depending on location.
Learning budgeting skills is vital for students who want to avoid leaving university with a mountain of personal debt. Budgeting requires students to remain focused on their finances and to think about how they will spend their money – something that is not always easy for young people who start a new term with a bank balance that can look deceptively large.
Students are faced with an array of tempting expenses and a host of new friends which coupled with money in the bank makes overspending on personal entertainment far too tempting for many to avoid. As a result, it is common for students to incrementally accumulate significant debts.
Most students have two primary sources of income other than assistance from their parents; student loans and part time jobs. There are well-established student loans schemes in most western countries offering the facility to pay back the money over a long period after graduation. Student loans are often characterised as ‘good debt’; that is someone taking on a loan that invests in their future. However while a student loan offers the opportunity to pursue an education, it can also leave the graduate with a significant burden to pay in the future. Currently the average debt of students is $27,000 in the US and $41,500 (£26,000) in the UK. Ominously however, the BBC reported that students starting university in the UK this year may leave with debts as high as $85,000 (£53,000); an immense burden for someone starting a life after university.
The problem is often that formalised student loans do not offer the only line of credit open to most students. Many banks make overdraft facilities available to students which can add to the debt burden.
It is therefore not possible to over-estimate the value of students having a firm grasp of the importance of financial planning and controlling their spending. Understanding the difference between necessary spending and discretional spending is vital for financial stability. Students need to make the distinction and realise it is far more important to ensure there are adequate funds available for necessities like rent, food, travel and textbooks. The smart student will make sure these expenses are the first that are covered in their budgeting and arrange their spending habits accordingly. Students who pay attention to their spending and allocate a finite amount of money for living expenses are far more likely to stay clear of debt; or at least minimise the amount of debt they take on before finishing their education.
One of the options for students to boost their income is to get a job. Many take on part-time work to give them some extra cash. However, care should be taken to avoid working too many hours which could have the effect of undermining their studies. Another option is to get a good job over the generous university holiday period, particularly over the long summer break. Generating a good income from holiday work can bring finances back into balance and reduce the overall debt burden after graduation.
In the UK this year, the numbers of university students fell for the first time in over a decade. More than 30 universities have reported a 10% drop in student numbers. This is almost universally attributed to the rise in fees and the increasing cost of higher education and many people are deciding to opt out because of the cost. Nevertheless it remains a fact that graduates have better future prospects. The UK’s Office National Statistics revealed last year that on average people with degrees earned over $19,000 (£12,000) a year more than people without. Therefore a university education remains the best starting point for working life and good financial planning throughout their student years will undoubtedly help young people get ahead even more.
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