From the perspective of an avocado toast-loving summer intern
I wake up on a high this morning. And for once, I let drivers rudely cut me off on my way to work. Who cares? It’s pay day — and with my recent OT hours, I’m expecting a “lucrative” one! 💰
At 10 AM, I get the push notification that makes my day:
“$XXXX.XX just got deposited into your checking account!”
Yup, definitely more than my typical earnings so far this internship. 🎉 I low-key fist pump in excitement, and for the next two hours, I can’t help but think about all the extra stuff I could afford now.
For lunch, I shamelessly splurge with my credit card on an avocado toast with smoked salmon, goat cheese and capers for a paltry $12. And a mango smoothie for another $5. Because why not? I got paid extra, I get points, and I get legit food. Plus, I can easily pay off my credit card bill this month.
Or… can I ? 😳
Still sitting there with my toast half-finished, that split second of doubt triggers me to pull out my phone and open up my banking app. I glance at my checking account balance for the first time in two weeks. Whoa, hold up. I look away and then glance at the number again. There’s no way I only have that much left of the intern cash I’ve made so far this summer. No way.
With dread, my eyes drop down to my credit card balance. Already?! It’s only the middle of the month… well, I’ll be damned. That explains it. I automatically pay off my full credit card balance each month, because #creditscore. Seeing that amount, my cash balance makes more sense.
My mind begins to race with questions. How haven’t I noticed this before? Where has all my money gone? There’s gotta be a mistake. I skim through my transactions for fraud. And it’s not long before the truth hits me.
Turns out it’s all by my own doing. My statement is filled with Uber, cafes, restaurants, bars, subscriptions and Amazon orders—mostly smaller amounts that have added up and that I could’ve avoided without suffering.
A wave of panic starts to creep into me. Why am I letting all my earnings sit in my spending account while racking up my credit card bill? I really gotta start saving. Determined to get back on track, I start to think through a bunch of different ways I could be using my earnings. With the help of my old friend Google, I jot down some notes…
(1) Save for retirement (likely via Roth IRA)
Like most sane people, I don’t want to work forever. I first heard about the Roth I(ndividual)R(etirement)A(ccount) from a friend. It’s basically a special savings + investment account rolled into one, designed to help us grow our money to the point where we can retire comfortably. And it’s the best choice for a working college student.
- I qualify for it because I’m single and earn under $117,000 a year.
- I can contribute $5,500 max annually (no minimum) from my post-tax income, and set up automatic transfers from my bank to make it easier.
- I’m almost certain to get higher returns than from a regular savings account’s interest—thanks to typically higher compounded interest rates.
- I can choose where to invest my money (i.e. bonds, stocks, etc). If I have no clue where to invest and want to be hands off (yup, that’s me ✋), I can put my money in a “target date fund” like Fidelity Freedom Funds, where a fund manager balances and adjusts my investment portfolio based on my target retirement goal and life stage. Or I could use robo-advisors like Betterment to do something similar, except via algorithms.
- I can withdraw funds I put in (my contributions, not earnings) at any time, income tax/penalty-free.
- I can withdraw my earnings income tax/penalty-free, only when I’m at least 59 1/2 years old and have held the account for ≥ 5 years. With other types of accounts, I’d owe income tax on any earnings I take out.
- I get no tax deductions on my contributions.
I could turn $900 into ~$6,300 in 40 years — assuming I deposit 10% of my $9k salary from a summer internship ($900) into a Roth IRA with an average annual return of 5%. But I can’t withdraw any of those earnings without paying taxes or penalty fees until then! Plus, the return seems low, considering how far off into the future it is... Do I care enough about retirement right now? Would I rather put that $900 towards something nearer-term?
(2) Pay off student loan debt (private first)
Ah, the bane of my existence and millions of others—to the tune of nearly $1.5 TRILLION dollars. I don’t want to be one of those people still paying these off in their 40's. It’d be nice to live without the stress from debt, right?
I have both subsidized and unsubsidized federal (Stafford) loans — with this year’s fixed interest rates rising up to 4.45%. The main difference is:
- For unsubsidized loans (which I have more of), I have to pay for ALL interest that starts accruing from my first loan disbursement in college—although I don’t have to start paying until 6 months after graduation.
- For subsidized loans, I only have to pay for the interest that starts accruing 6 months after graduation (since the government kindly pays for all interest accrued before that). 🙌
I also have a private student loan with a variable interest rate that could potentially rise up to 6–7% at any time.
At the very least, I should pay off the interest of my private loan on a monthly basis. I’d want to get rid of this loan first, because it has very few repayment options if life ever goes south, the interest rate could rise, and the interest compounds. I might even pay off some of my unsubsidized loan interest too, so I don’t pay excessive interest (all accrued interest gets added to principal balance after the 6-month grace period, a.k.a. it starts compounding). Ultimately, it boils down to this: How badly do I want to live debt-free?
(3) Build an emergency fund
$#! happens in life. I might have to quit my part-time job due to a heavy course load. My laptop might get stolen. I might need to get my car towed.
It’s generally a good idea to have enough easily-accessible cash for these unforeseen circumstances, because it’s not ideal to get into more credit card debt. This emergency fund should be separate from my everyday spending accounts—ideally kept in a high-yield online savings account (which have better interest rates than most traditional savings accounts).
Experts suggest saving up for 3–6 months of expenses. But as a “poor” college student with a temporary internship, it’d be hard to build a large nest egg. I’d start easy by saving up to $1,000 for a 1–2 month safety net via tiny automatic transfers, and then slowly increase it. If I didn’t have credit card debt and a private student loan, THIS would be my top priority. But the arrogant side of me thinks that I could survive without one and save for something else instead, since luck tends to be on my side… (knock on wood).
(4) Pay off credit card debt
This is where a lot of inexperienced people get destroyed. When you only pay the minimum amount due monthly, the interest (typically very high for credit cards) continues to compound over time on your balance, leading to growing credit card debt. And it’s even worse when you don’t set up automatic payments and miss them, resulting in penalty fees. Now imagine how crazy things can get with multiple credit cards!
Good thing I only have one card and pay it off in full every month. In fact, about 2/3 of college students do that. For me, the challenge is to control my spending and the urge to rack up points. I have to ensure that I can continue to pay off the bills and keep my credit score high. It’d help to think about my credit as my cash, not as money I can borrow and pay back later.
If I did have credit card debt though, I’d choose to knock that out first before tackling my student loan debt! This is because I’d want to improve my credit score, and credit card interest rates are also A LOT higher than student loan interest rates (think average 14%-22% APR, also compounded).
I’ve talked about going to Coachella for 2–3 years now... and I STILL haven’t made it there. I can’t begin to count how many times I’ve looked at Coachella ticket prices and depressingly thought to myself: “No freaking way I can afford that…”. Or how many times I’ve turned down other concerts, fun trips and study abroad plans with friends because I was broke, or felt so at least. Now I’m starting to realize, I CAN afford those things—as long as I plan ahead and set them as tangible goals. 🚀
I only get 4 undergrad years in college. Once I enter the real world, all the #adulting stress will start piling up. And a lot of my friends will head off to different places. If I don’t make the most out of my college years, I think I’d regret that more than anything else down the road. These experiences can create memories that last a lifetime, help me strengthen friendships and meet new people, and allow me to explore more and grow as a person.
I think I’d be okay without retirement savings for now. But am I willing to risk increasing my debt and/or not having an emergency fund to make my college years as epic as possible? Am I confident enough that I can make up for those later, and end up in a win-win situation?
Sadly, these don’t even include affording my day-to-day living expenses, maybe dabbling with the stock market (SNAP, anyone?), maybe investing in my employability with online courses, maybe saving for a house, maybe collecting Yeezys. But my brain is fried, my toast got way cold, and I think I already have a good sense of how I can make my paycheck go further!
It’s too bad there’s no one-size-fit-all formula, because everyone’s needs and wants are different. Now, I just need to figure out how to balance my priorities and tradeoffs, and then turn them into a specific action plan. It would include automated savings and simple, flexible budgeting— both of which would be fluid depending on my income, living situation and priorities. And maybe even side hustle that could bring in extra dough. 🤑
Automating regular savings for some of my goals won’t be enough. I’ll need to cut down on my everyday spending and splurges to stay on track. I’ll likely put those “extra” bucks towards short-term goals like travel, because that’s just simply more motivating and exciting !
So I'm curious, what are YOU currently doing or planning to do with your summer earnings? Sharing our ideas could lead to more awesome ones. We’re all in this together, so let’s win at life together.