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Everything You Need to Know About Budgeting As a Freelancer
Could logging in to your computer from a deluxe treehouse off the coast of Belize be the future of work? Maybe. For many, the word freelance means flexibility, meaningful tasks and better work-life balance. Who doesn’t want to create their own hours, love what they do and work from wherever they want? Freelancing can provide all of thatâbut that freedom can vanish quickly if you don’t handle your expenses correctly.
“A lot of the time, you don’t know about these expenses until you are in the trenches,” says freelance copywriter Alyssa Goulet, “and that can wreak havoc on your financial situation.”
Nearly 57 million people in the U.S. freelanced, or were self-employed, in 2019, according to Upwork, a global freelancing platform. Freelancing is also increasingly becoming a long-term career choice, with the percentage of freelancers who freelance full-time increasing from 17 percent in 2014 to 28 percent in 2019, according to Upwork. But for all its virtues, the cost of being freelance can carry some serious sticker shock.
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“There are many hats you have to wear and expenses you have to take on, but for that you’re gaining a lot of opportunity and flexibility in your life.”
Most people who freelance for the first time don’t realize that everythingâfrom taxes to office supplies to setting up retirement plansâis on them. So, before you can sustain yourself through self-employment, you need to answer a very important question: “Are you financially ready to freelance?”
What you’ll find is that budgeting as a freelancer can be entirely manageable if you plan for the following key costs. Let’s start with one of the most perplexingâtaxes:
1. Taxes: New rules when working on your own
First things first: Don’t try to be a hero. When determining how to budget as a freelancer and how to manage your taxes as a freelancer, you’ll want to consult with a financial adviser or tax professional for guidance. A tax expert can help you figure out what makes sense for your personal and business situation.
For instance, just like a regular employee, you will owe federal income taxes, as well as Social Security and Medicare taxes. When you’re employed at a regular job, you and your employer each pay half of these taxes from your income, according to the IRS. But when you’re self-employed (earning more than $400 a year in net income), you’re expected to file and pay these expenses yourself, the IRS says. And if you think you will owe more than $1,000 in taxes for a given year, you may need to file estimated quarterly taxes, the IRS also says.
That can feel like a heavy hit when you’re not used to planning for these costs. “If you’ve been on a salary, you don’t think about taxes really. You think about the take-home pay. With freelance, everything is take-home pay,” says Susan Lee, CFP®, tax preparer and founder of FreelanceTaxation.com.
When you’re starting to budget as a freelancer and determining how often you will need to file, Lee recommends doing a “dummy return,” which is an estimation of your self-employment income and expenses for the year. You can come up with this number by looking at past assignments, industry standards and future projections for your work, which freelancer Goulet finds valuable.
“Since I don’t have a salary or a fixed number of hours worked per month, I determine the tax bracket I’m most likely to fall into by taking my projected monthly income and multiplying it by 12,” Goulet says. “If I experience a big income jump because of a new contract, I redo that calculation.”
After you estimate your income, learning how to budget as a freelancer means working to determine how much to set aside for your tax payments. Lee, for example, recommends saving about 25 percent of your income for paying your income tax and self-employment tax (which funds your Medicare and Social Security). But once you subtract your business expenses from your freelance income, you may not have to pay that entire amount, according to Lee. Deductible expenses can include the mileage you use to get from one appointment to another, office supplies and maintenance and fees for a coworking space, according to Lee. The income left over will be your taxable income.
Pro Tip:
To set aside the taxes you will need to pay, adjust your estimates often and always round up. “Let’s say in one month a freelancer determines she would owe $1,400 in tax. I’d put away $1,500,” Goulet says.
2. Business expenses: Get a handle on two big areas
The truth is, the cost of being freelance varies from person to person. Some freelancers are happy to work from their kitchen tables, while others need a dedicated workspace. Your freelance costs also change as you add new tools to your business arsenal. Here are two categories you’ll always need to account for when budgeting as a freelancer:
Your workspace
Joining a coworking space gets you out of the house and allows you to establish the camaraderie you may miss when you work alone. When you’re calculating the cost of being freelance, note that coworking spaces may charge membership dues ranging from $20 for a day pass to hundreds of dollars a month for a dedicated desk or private office. While coworking spaces are all the rage, you can still rent a traditional office for several hundred dollars a month or more, but this fee usually doesn’t include community aspects or other membership perks.
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If you want to avoid office rent or dues as costs of being freelance but don’t want the kitchen table to pull double-duty as your workspace, you might convert another room in your home into an office. But you’ll still need to outfit the space with all of your work essentials. Freelance copywriter and content strategist Amy Hardison retrofitted part of her house into a simple office. “I got a standing desk, a keyboard, one of those adjustable stands for my computer and a squishy mat to stand on so my feet don’t hurt,” Hardison says.
Pro Tip:
Start with the absolute necessities. When Hardison first launched her freelance career, she purchased a laptop for $299. She worked out of a coworking space and used its office supplies before creating her own workspace at home.
Digital tools
There are a range of digital tools, including business and accounting software, that can help with the majority of your business functions. A big benefit is the time they can save you that is better spent marketing to clients or producing great work.
The software can also help you avoid financial lapses as you’re managing the costs of being freelance. Hardison’s freelance business had ramped up to a point where a manual process was costing her money, so using an invoicing software became a no-brainer. “I was sending people attached document invoices for a while and keeping track of them in a spreadsheet,” Hardison says. “And then I lost a few of them and I just thought, ‘Oh, my God, I can’t be losing things. This is my income!’”
Digital business and software tools can help manage scheduling, web hosting, accounting, audio/video conference and other functions. When you’re determining how to budget as a freelancer, note that the costs for these services depend largely on your needs. For instance, several invoicing platforms offer options for as low as $9 per month, though the cost increases the more clients you add to your account. Accounting services also scale up based on the features you want and how many clients you’re tracking, but you can find reputable platforms for as little as $5 a month.
Pro Tip:
When you sign up for a service, start with the “freemium” version, in which the first tier of service is always free, Hardison says. Once you have enough clients to warrant the expense, upgrade to the paid level with the lowest cost. Gradually adding services will keep your expenses proportionate to your income.
3. Health insurance: Harnessing an inevitable cost
Budgeting for healthcare costs can be one of the biggest hurdles to self-employment and successfully learning how to budget as a freelancer. In the first half of the 2020 open enrollment period, the average monthly premium under the Affordable Care Act (ACA) for those who do not receive federal subsidiesâor a reduced premium based on incomeâwas $456 for individuals and $1,134 for families, according to eHealth, a private online marketplace for health insurance.
“Buying insurance is really protecting against that catastrophic event that is not likely to happen. But if it does, it could throw everything else in your plan into a complete tailspin,” says Stephen Gunter, CFP®, at Bridgeworth Financial.
A good place to start when budgeting as a freelancer is knowing what healthcare costs you should budget for. Your premiumâwhich is how much you pay each month to have your insuranceâis a key cost. Note that the plans with the lowest premiums aren’t always the most affordable. For instance, if you choose a high-deductible policy you may pay less in premiums, but if you have a claim, you may pay more at the time you or your covered family member’s health situation arises.
When you are budgeting as a freelancer, the ACA healthcare marketplace is one place to look for a plan. Here are a few other options:
- Spouse or domestic partner’s plan: If your spouse or domestic partner has health insurance through his/her employer, you may be able to get coverage under their plan.
- COBRA: If you recently left your full-time job for self-employment, you may be able to convert your employer’s group plan into an individual COBRA plan. Note that this type of plan comes with a high expense and coverage limit of 18 months.
- Organizations for freelancers: Search online for organizations that promote the interests of independent workers. Depending on your specific situation, you may find options for health insurance plans that fit your needs.
Pro Tip:
Speak with an insurance adviser who can help you figure out which plans are best for your health needs and your budget. An adviser may be willing to do a free consultation, allowing you to gather important information before making a financial commitment.
4. Retirement savings: Learn to “set it and forget it”
Part of learning how to budget as a freelancer is thinking long term, which includes saving for retirement. That may seem daunting when you’re wrangling new business expenses, but Gunter says saving for the future is a big part of budgeting as a freelancer.
“It’s kind of the miracle of compound interest. The sooner we can get it invested, the sooner we can get it saving,” Gunter says.
He suggests going into autopilot and setting aside whatever you would have contributed to an employer’s 401(k) plan. One way to do this might be setting up an automatic transfer to your savings or retirement account. “So, if you would have put in 3 percent [of your income] each month, commit to saving that 3 percent on your own,” Gunter says. The Discover IRA Certificate of Deposit (IRA CD) could be a good fit for helping you enjoy guaranteed returns in retirement by contributing after-tax (Roth IRA CD) or pre-tax (traditional IRA CD) dollars from your income now.
Pro Tip:
Prioritize retirement savings every month, not just when you feel flush. “Saying, ‘I’ll save whatever is left over’ isn’t a savings plan, because whatever is left over at the end of the month is usually zero,” Gunter says.
5. Continually update your rates
One of the best things you can do for yourself in learning how to budget as a freelancer is build your costs into what you charge. “As I’ve discovered more business expenses, I definitely take those into account as I’m determining what my rates are,” Goulet says. She notes that freelancers sometimes feel guilty for building business costs into their rates, especially when they’re worried about the fees they charge to begin with. But working the costs of being freelance into your rates is essential to building a thriving freelance career. You should annually evaluate the rates you charge.
Because your expenses will change over time, it’s wise to do quarterly and yearly check-ins to assess your income and costs and see if there are processes you can automate to save time and money.
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“A lot of the time, you don’t know about these expenses until you are in the trenches, and that can wreak havoc on your financial situation.”
Have confidence in your freelance career
Accounting for the various costs of being freelance makes for a more successful and sustainable freelance career. It also helps ensure that those who are self-employed achieve financial stability in their personal lives and their businesses.
“There are many hats you have to wear and expenses you have to take on,” Goulet says. “But for that, you’re gaining a lot of opportunity and flexibility in your life.”
The post Everything You Need to Know About Budgeting As a Freelancer appeared first on Discover Bank – Banking Topics Blog.
Source: discover.com
The Difference Between Credit Cards and Debit Cards: Explainedâââ
Have you ever wondered about the uses of a credit card vs. a debit card? It’s likely you have both types of cards in your wallet at this very moment, and you’re given the option to choose one of themâsometimes in a matter of secondsâevery time you make a purchase. Still, you have lingering uncertainty about whether you’re making the best choice… and that same question pops into the back of your mind every time you buy something: “Should I use a credit card or debit card?”
Being uncertain about the difference between a credit card and debit card or the best time to use either is a common dilemma. The better you understand the benefits of eachâbeyond the fact they offer a way to access money without having to carry cash or a checkbook aroundâthe savvier a spender you’ll become.
Managing revolving credit vs. a bank account balance
Credit cards and debit cards both offer a convenient way to pay for things, but they work quite differently behind the scenes. As a result, they each appeal to different types of consumers, says Lou Haverty, financial analyst and founder of Financial Analyst Insider.
A credit card is a form of revolving credit. When you spend with your credit card you are borrowing, and you pay interest if you carry a balance, Haverty says. A debit card, by contrast, is linked to a bank accountâusually a checking accountâand the money is withdrawn as soon as you make the transaction, typically using a PIN.
A difference between credit cards and debit cards is that with a credit card, the exact amount you can spend depends on your credit limit and the balance you are currently carrying on the card, Haverty explains. If you have a $1,000 credit limit and a $600 balance from previous purchases, you can continue to charge an additional $400. If you’ve reached your credit limit, you won’t be able to use the card for more purchases until you pay off at least part of the balance. You owe a minimum payment each month.
When considering credit card vs. debit card, know that most credit cards carry an interest rate, expressed as an annual percentage rate (APR), which is essentially what you pay to borrow. You’ll have to pay interest on that $600 balance mentioned above if you carry the balance from month to month. âCredit cards require a responsible approach to your personal finances because you have the ability to spend beyond what you might have as cash in your bank account,” Haverty says.
A difference between credit cards and debit cards is that with a debit card, funds are pulled directly from the balance you have in the checking account to which the card is linked. In a traditional account setup, you can’t spend more than what you have in the account, which helps reduce the chance of racking up debt. If your account offers overdraft protection, you may be able to spend more than your account balance by leveraging funds from a different, linked bank account.
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âCredit cards require a responsible approach to your personal finances because you have the ability to spend beyond what you might have as cash in your bank account.”
Knowing the requirements for each card
Another key difference between a credit card and a debit card is the criteria you’ll need to meet for each. âGetting approved for a credit card is usually dependent on your personal credit score. The higher your credit score, the more likely you are to be approved,” Haverty says. âIf you have a lower credit score, you may still get approved, but you might have a lower credit limit.”
Patricia Stallworth, certified financial planner and money coach, says that in addition to your credit history, factors such as your employment status could play a role in credit card approval.
When analyzing credit cards vs. debit cards, consider that a debit card is typically issued automatically when you open a checking account. This process usually requires some personal information, such as a Social Security number, driver’s license, employment information and valid email address. A deposit may also be needed to fund the account and complete the application. Then stay tuned for your debit card in the mail!
When should I use credit vs. debit?
While it’s easy to have credit card vs. debit card on the mind, there are some scenarios in which using either a debit card or a credit card could fit the bill, depending on your financial needs and goals. Use the outline below as a guide for when the question of “When should I use credit vs. debit?” comes up:
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Use your debit card if…
- You’re new to using a card to make purchases. Until you know you have the discipline to control your spending with a card, a debit card could be the way to go, as it’s a great tool for ensuring you don’t charge more than you can afford. âDebit cards are great for everyday purchases that you have budgeted for because the money comes directly out of your account,” Stallworth says.
- You want cash back without the fees. If your debit card is linked to a checking account that offers rewards, Stallworth says you may have rewards-earning potential without the hassle of fees. âWhile there is generally no cost to participate in debit card rewards programs, the costs and fees may be higher with some credit card programs,” she adds. For instance, Discover Cashback Debit charges no fees1 and allows you to earn 1% cash back on up to $3,000 in debit card purchases each month.2
Why should credit cards have all the fun?
Now you can earn cash back with your debit card.
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- You have debt you can’t pay off. When should I use credit vs. debit? âIf you’re struggling to manage or get out of debt, a debit card should be your ‘go-to card,’” Stallworth says. “You can’t get out of debt if you keep charging.”
- You want cash at the register. If you still like to have cash in your wallet, consider this difference between credit cards and debit cards: Most retail stores will allow you to get cash at the register when you pay with your debit card. âA credit card will most likely charge you a cash advance fee if that feature is available,” Haverty says.
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“Debit cards are great for everyday purchases that you have budgeted for because the money comes directly out of your account.”
Use your credit card if…
- You want product coverage. Some credit cards come with purchase protection, which makes them a great option for online and large purchases, Stallworth says. “If I have a dispute with a merchant, I have more leverage with a large credit card company behind me.”
- You’re trying to build (or rebuild) your credit. âYou will need a single credit card with a small limit that you pay off in full each month to build a credit history,” Haverty says. A key difference between credit cards and debit cards is that debit card usage can’t help you build a credit history. A debit card can help you build strong budgeting skills so you’re better prepared to transition to a credit card.
- You want to earn travel rewards. If you’re debating credit card vs. debit card and are focused on travel, consider that credit card rewards programs may offer robust rewards in a specific category, like travel, Stallworth says. While it’s always important to read the fine print (so you’re not paying more than you intend in fees or interest rate charges just to get rewards), you could find a credit card that offers opportunities to earn free flights and pay less for checked baggageâjust for using the card regularly.
How to use both cards to maximize your finances
Now that you understand which circumstances might be best to use a credit card vs. debit card, you can make the point-of-purchase decision of “When should I use credit vs. debit?” a little easier. It really depends on the goals you have laid out for your personal finances.
Get comfortable using both financial tools for their respective features. But be sure to stick to your budget, and don’t accidentally overspend from your bank account or charge more than you can afford to pay in full by your credit card’s monthly due date. When you learn to confidently use both of these cards to your advantage, you can enjoy all the various perks and protectionsâtimes two!
1 Outgoing wire transfers are subject to a service charge. You may be charged a fee by a non-Discover ATM if it is not part of the 60,000+ ATMs in our no-fee network.
2 ATM transactions, the purchase of money orders or other cash equivalents, cash over portions of point-of-sale transactions, Peer-to-Peer (P2P) payments (such as Apple Pay Cash), and loan payments or account funding made with your debit card are not eligible for cash back rewards. In addition, purchases made using third-party payment accounts (services such as Venmo® and PayPal
, who also provide P2P payments) may not be eligible for cash back rewards. Apple, the Apple logo and Apple Pay are trademarks of Apple Inc., registered in the U.S. and other countries.
The post The Difference Between Credit Cards and Debit Cards: Explainedâââ appeared first on Discover Bank – Banking Topics Blog.
Source: discover.com
What Are Mutual Funds? Understanding The Basics
If you’re one of those investors with very little time to research and invest in individual stocks, it might be a good idea to look into investing in mutual funds.
Whether your goal is to save money for retirement, or for a down payment to buy a house, mutual funds are low-cost and effective way to invest your money.
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What is a mutual fund?
A mutual fund is an investment vehicle in which investors, like you ad me, pool their money together. They use the money to invest in securities such as stocks and bonds. A professional manages the funds.
In addition, mutual funds are cost efficient. They offer diversification to your portfolio. They have low minimum investment requirements.
These factors make mutual funds among the best investment vehicles to use. If you’re a beginner investor, you should consider investing in mutual funds or index funds.
Investing in the stock market in general, can be intimidating. If you are just starting out and don’t feel confident in your investing knowledge, you may value the advice of a financial advisor.
Types of mutual funds
There are different types of mutual funds. They are stock funds, bond funds, and money market funds.
Which funds you choose depends on your risk tolerance. While mutual funds in general are less risky than investing in individual stocks, some funds are riskier than others.
However, you can choose a combination of these three types of funds to diversify your portfolio.
- Stock funds: a stock fund is a fund that invests heavily in stocks. However, that does not mean stock funds do not have other securities, i.e., bonds. It’s just that the majority of the money invested is in stocks.
- Bond funds: if you don’t want your portfolio to fluctuate in value as stocks do, then you should consider bond funds.
- Money market funds: money market funds are funds that you invest in if you tend to tap into your investment in the short term.
- Sector funds. As the name suggests, sector funds are funds that invests in one particular sector or industry. For example, a fund that invests only in the health care industry is a sector fund. These mutual funds lack diversification. Therefore, you should avoid them or use them in conjunction to another mutual fund.
Additional funds
- Index funds. Index funds seek to track the performance of a particular index, such as the Standard & Poorâs 500 index of 500 large U.S. company stocks or the CRSP US Small Cap Index. When you invest in the Vanguard S&P 500 Index fund, youâre essentially buying a piece of the 500 largest publicly traded US companies. Index funds donât jump around. They stay invested in the market.
- Income funds: These funds focus invest primarily in corporate bonds. They also invest in some high-dividend stocks.
- Balance funds: The portfolio of these funds have a mixed of stocks and bonds. Those funds enjoy capital growth and income dividend.
Related Article: 3 Ways to Protect Your Portfolio from the Volatile Stock Market
The advantages of mutual funds
Diversification. You’ve probably heard the popular saying “don’t put all of your eggs in one basket.” Well, it applies to mutual funds. Mutual funds invest in stocks or bonds from dozens of companies in several industries.
Thus, your risk is spread. If a stock of a company is not doing well, a stock from another company can balance it out. While most funds are diversified, some are not.
For example, sector funds which invest in a specific industry such as real estate can be risky if that industry is not doing well.
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Professional Management.
Mutual funds are professionally managed. These fund managers are well educated and experienced. Their job is to analyze data, research companies and find the best investments for the fund.
Thus, investing in mutual funds can be a huge time saver for those who have very little time and those who lack expertise in the matter.
Cost Efficiency. The operating expenses and the cost that you pay to sell or buy a fund are cheaper than trading in individual securities on your own. For example, the best Vanguard mutual funds have operating expenses as low as 0.04%. So by keeping expenses low, these funds can help boost your returns.
Low or Reasonable Minimum Investment. The majority of mutual funds, Vanguard mutual funds, for example, have a reasonable minimum requirement. Some funds even have a minimum of $1,000 and provide a monthly investment plan where you can start with as little as $50 a month.
Related Article: 7 Secrets Smart Professionals Use to Choose Financial Advisors
The disadvantage of mutual funds.
While there are several benefits to investing in mutual funds, there are some disadvantages as well.
Active Fund Management. Mutual funds are actively managed. That means fund mangers are always on the look out for the best securities to purchase. That also means they can easily make mistakes.
Cost/expenses. While cost and expenses of investing in individual stocks are significantly higher than mutual funds, cost of a mutual fund can nonetheless be significant.
High cost can have a negative effect on your investment return. These fees are deducted from your mutual fundâs balance every year. Other fees can apply as well. So always find a company with a low cost.
How you make money with mutual funds.
You make money with mutual funds the same way you would with individual stocks: dividend, capital gain and appreciation.
Dividend: Dividends are cash distributions from a company to its shareholders. Some companies offer dividends; others do not. And those who do pay out dividends are not obligated to do so. And the amount of dividends can vary from year to year.
As a mutual fund investor, you may receive dividend income on a regular basis.
Mutual funds offer dividend reinvestment plans. This means that instead of receiving a cash payment, you can reinvest your dividend income into buying more shares in the fund.
Capital gain distribution: in addition to receiving dividend income from the fund, you make money with mutual funds when you make a profit by selling a stock. This is called “capital gain.”
Capital gain occurs when the fund manager sells stocks for more he bought them for. The resulting profits can be paid out to the fund’s shareholders. Just as dividend income, you have the choice to reinvest your gains in the fund.
Appreciation: If stocks in your fund have appreciated in value, the price per share of the fund will increase as well. So whether you hold your shares for a short term or long term, you stand to make a profit when the shares rise.
Best mutual funds.
Now that you know mutual funds make excellent investments, finding the best mutual funds can be overwhelming.
Vanguard mutual funds.
Vanguard mutual funds are the best out there, because they are relatively cheaper; they are of high quality; a professional manage them; and their operating expenses are relative low.
Here is a list of the best Vanguard mutual funds that you should invest in:
- Vanguard Total Stock Market Index Funds
- Vanguard 500 Index (VFIAX)
- Total International Stock index Fund
- Vanguard Health Care Investor
Vanguard Total Stock Market Fund
If you’re looking for a diversified mutual fund, this Vanguard mutual fund is for you. The Vanguard’s VTSAX provides exposure to the entire U.S. stock market which includes stocks from large, medium and small U.S companies.
The top companies include Microsoft, Apple, Amazon. In addition, the expenses are relatively (0.04%). It has a minimum initial investment of $3,000, making it one of the best vanguard stock funds out there.
Vanguard S&P 500 (VFIAX)
The Vanguard 500 Index fund may be appropriate for you if you prefer a mutual fund that focuses on U.S. equities. This fund tracks the performance of the S&P 500, which means it holds about 500 of the largest U.S. stocks.
The largest U.S. companies included in this fund are Facebook, Alphabet/Google, Apple, and Amazon. This index fund has an expense ration of 0.04% and a reasonable minimum initial investment of $3,000.
Vanguard Total International Stock Market
You should consider the Vanguard International Stock Market fund of you prefer a mutual fund that invests in foreign stocks.
This international stock fund exposes its shareholders to over 6,000 non-U.S. stocks from several countries in both developed markets and emerging markets. The minimum investment is also $3,000 with an expense ratio of 0.11%.
Vanguard Health Care Investor
Sector funds are not usually a good idea, because the lack diversification. Sector funds are funds that invest in a specific industry like real estate or health care. However, if you want a fund to complement your portfolio, the Vanguard Health Care Investor is a good choice.
This Vanguard mutual fund offers investors exposure to U.S. and foreign equities focusing in the health care industry. The expense ration is a little bit higher, 0.34%. However, the minimum initial investment is $3,000, making it one of the cheapest Vanguard mutual funds.
Bottom Line
Mutual funds are great options for beginner investors or investors who have little time to research and invest in individual stocks. When you buy into these low cost investments, you’re essentially buying shares from companies.
Your money are pooled together with those of other investors. If you intend to invest in low cost investment funds, you must know which ones are the best. When it comes to saving money on fees and getting a good return on your investment, Vanguard mutual funds are among the best funds out there.
They provide professional management, diversity, low cost, income and price appreciation.
What’s Next: 5 Mistakes People Make When Hiring A Financial Advisor
Speak with the Right Financial Advisor
- If you have questions beyond knowing which of the best Vanguard mutual funds to invest, you can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc).
- Find one who meets your needs with SmartAssetâs free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.
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The post What Are Mutual Funds? Understanding The Basics appeared first on GrowthRapidly.
Source: growthrapidly.com
6 Tips for Successfully Managing a Checking Account in College
Heading off to college is exciting. Really exciting. You finally have freedom! You’re out on your own for the very first time, managing your studies, managing your social life and… managing your finances.
Despite being a big part of your newfound independence, personal finance is a subject you probably won’t find on your course schedule. If you didn’t take a personal finance class in high school and never had money lessons from your parents, you may not know how to manage a checking account as a college student.
“College students have very different needs for their checking account than their parents or other adults,” says Tommy Martin, CEO of Clear Path Financial Planning and a finance blogger at TommyMartin.com. If you live in a different city during the school year than you do during winter and summer breaks, for example, you may be after a bank for which location doesn’t matter.
Ok, so how do I manage my checking account in college, you ask? First, don’t get overwhelmed. Learning how to manage money while in college and getting a handle on checking account basics is simpler than you might think (oh, and the skills will serve you for years to come). Second, you can kick off your checking account education with these tips for managing a checking account in college:
1. Compare checking accounts before signing up
While your college life may center around your school campus, you should consider venturing off-campus to pick the right checking account for your lifestyle.
“Students typically sign up with a bank that’s on campus or close to campus,” says Sahil Vakil, a financial planner and president of MYRA Wealth in New Jersey. However, the nearest bank might not be the one that best fits your needs, he adds.
Instead of picking a bank based solely on proximity, consider all of your options, including banks with off-campus locations and online-only banks.
Martin agrees, saying that learning how to manage money while in college means considering all of your banking options rather than “automatically enrolling or choosing the official school bank just because it has the school logo on it.” There are other ways to show your school pride, after all.
2. Learn about checking account fees and rewards
Vakil and Martin both say a tip for managing a checking account in college is to consider an account’s fees before signing up. Costly fees can eat into your savings and spending money, which can be a blow for students who are not working full-time. When you are choosing a checking account in college, consider fees for:
- Monthly maintenance (essentially keeping your account open)
- Minimum balance (not maintaining one)
- ATM usage
- New checks
- Wire transfers
- Online bill pay
- Replacement debit cards
Martin says a checking account with no minimum balance requirement or minimum number of transactions could be a good fit for students. “It allows them to focus on their education” instead of worrying about incurring penalties, he says. “Even a $5 fee on a checking account with $60 in it can be devastating.”
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Costly fees can eat into your savings and spending money, which can be a blow for students who are not working full-time.
Martin also suggests finding an account that has a large network of no-fee ATMs located across the country to better manage your checking account as a college student. “Especially if you’re going to a school in a different state, the local bank from home might wind up costing you a lot in terms of ATM fees,” he says. If your parents plan to wire you money, find an account that doesn’t charge incoming wire fees, Martin adds.
While fees should be a focus when you are learning how to manage money while in college, don’t forget about incentives. You may be able to find a checking account that actually helps you grow your balance by paying interest or offering a cash back rewards program.
“If you have to pay for books or supplies, at least you can get some cash back and use it for a free dinner,” Martin says. Discover Cashback Debit, for example, offers 1% cash back on up to $3,000 in debit card purchases each month.1
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3. Track your checking account balance
Luckily, you don’t need to take Banking 101 to figure out your funds, and tech makes tracking your balance and account activity easier than ever. Most banks let you log in to your account online (don’t get distracted in class!), and with a bank’s mobile app you can transfer money to friends, pay bills, deposit checks and check your balanceâall while you’re on the go.
Knowing your balance at all times is a tip for managing a checking account in college because it can help you avoid overdrafts and insufficient funds fees. It can also help you forecast your income and expenses to ensure you’ll have enough money to cover future costs. Surpriseâthat’s budgeting!
There’s no one-size-fits-all budgeting program or system, though. You can go old-school and track your budget on a printed-out budget sheet, or you can go tech-savvy with a budgeting and spending app. “What’s best for you is the one you’re actually going to use,” Martin says.
If you learn how to manage money while in college and make a practice of maintaining your budget, the habit will follow you after graduation.
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âCollege students have very different needs for their checking account than their parents or other adults.â
4. Secure your account
One of Vakil’s tips for managing a checking account in college is to make sure your account stays secure. Create a unique account name and password that you use only for your checking account, and never share your credentials.
Vakil says you can also enable two-factor authentication if your bank offers it and you’re looking for another way to improve the management of your checking account as a college student. “This additional layer of protection safeguards your sensitive financial data and strengthens the security of your account by requiring two methods of verifying your identity.”
For example, if you log in to your account from a new device, you may be sent a text message with a code that you’ll need to enter to access your account.
5. Keep an eye out for debit card holds
No matter where you bank, a merchant may place a hold on funds in your checking account when you use your debit card. Generally, a hold is placed for travel-related purchasesâsuch as at rental car companies, hotels and gas stationsâand used by merchants to protect against fraud and errors.
“Holds on a debit card can make it tricky for you to manage your finances,” Vakil says. For example, “when you rent a car, the car rental company might put a $500 hold on your account. If the balance in your account was $550, now you can only use another $50.”
Being aware of holds can be particularly important if you are managing a checking account as a college student and tend to have a low account balance.
If a merchant will be placing a hold, it will generally post a sign to notify customers. The hold will typically be removed after the funds are transferred to the merchant from your financial institution, typically within three to four days.
Knowing when a hold will be placed, the amount of the hold and how much money you have in your checking account can help you manage your checking account as a college student by avoiding overdrafts and missed bill payments due to insufficient funds.
6. Don’t let one mistake throw you off track
If you can learn how to manage a checking account as a college student, and more generally, how to manage money while in college, you can lay the groundwork for a solid financial future. Checking account mistakes may occasionally happen (oops, I didn’t budget enough for that spring break trip), but don’t let them discourage you to the point of apathy. Instead, try to continually expand your knowledge and practice healthy financial habits.
1 ATM transactions, the purchase of money orders or other cash equivalents, cash over portions of point-of-sale transactions, Peer-to-Peer (P2P) payments (such as Apple Pay Cash), and loan payments or account funding made with your debit card are not eligible for cash back rewards. In addition, purchases made using third-party payment accounts (services such as Venmo® and PayPal
, who also provide P2P payments) may not be eligible for cash back rewards. Apple, the Apple logo and Apple Pay are trademarks of Apple Inc., registered in the U.S. and other countries. Venmo and PayPal are registered trademarks of PayPal, Inc.
The post 6 Tips for Successfully Managing a Checking Account in College appeared first on Discover Bank – Banking Topics Blog.
Source: discover.com