From the perspective of an avocado toast-loving summer intern
I wake up on a high this morning. For once, I let drivers rudely cut me off on my way to work. Who cares? With my recent OT hours, I’m expecting a “lucrative” payday! 💰
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 paycheck! For the next two hours, I can’t stop thinking about all the extra stuff I could splurge on now.
For lunch, I shamelessly get an avocado toast with smoked salmon for a paltry $12 with my credit card. And a 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.
Or… can I ? 😳
That split second of doubt triggers me to open up my banking app. I glance at my checking account balance for the first time in over a month. Whoa, hold up. There’s no way I only have that much left of my internship earnings so far.
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 checking account balance makes more sense.
But where exactly has all my money gone? There’s gotta be a mistake. I skim through my transactions for fraud, only to get hit by the cold hard truth.
Turns out it has been all me. Ubers, cafes, restaurants, bars, subscriptions, Amazon orders, you name it. All these purchases have added up like crazy.
A wave of panic hits me. Why am I letting all my earnings sit in my spending account while racking up my credit card bill? I gotta start treating my money right and getting my $#%@ together. So I start to think through smarter ways I could be using my earnings — besides necessary costs like next semester's expenses, rent, etc. With the help of Google, I jot down some notes and thoughts in no particular order.
(1) 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. It’d be nice to not have to worry about that through my 40s, right?
I have both subsidized and unsubsidized federal (Stafford) loans, with this year’s fixed federal interest rates rising up to 4.53%. 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. But 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.
TLDR: I should at least 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, interest rate could rise, and interest compounds. I might even pay off some 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. starts compounding). Ultimately: How badly do I want to live debt-free?
(2) Build a rainy day 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 get my car towed.
It’s important to have enough cash that's easily accessible 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 in a savings account that I don't touch unless I absolutely have to.
Experts suggest saving up for 3–6 months of expenses. But as a “poor” college student with a short internship, it’d be hard to build a large nest egg.
TLDR: I’d start easy by saving up to $1,000 for a 1–2 month safety net, and then slowly increase it. Perhaps I should make an initial rainy day fund my top priority, as it's scary to not have one. But the arrogant me thinks I can survive without one and save for something else instead, since luck tends to be on my side… (knock on wood).
(3) Pay off credit card debt
This is where a lot of financial novices get destroyed. When you only pay the minimum amount due monthly, the interest (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. Imagine how much crazier things can get with multiple cards!
Good thing I only have one card and pay it off in full every month. In fact, about 60% of college students do that. For me, the challenge is to control my urge to rack up points. I can end up paying more in interest than points earned. I have to ensure that I can continue to pay off the bills and keep improving my credit score. It’d help to think about my credit as my cash, not as money I can borrow and pay back later.
TLDR: If I did have credit card debt though, I’d try to knock that out first before tackling student loan debt! This is because I’d want to improve my credit score, and credit card interest rates are A LOT higher than student loan interest rates (think 14%-22%+ APR, also compounded).
(4) 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. 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 my contributions any time, income tax/penalty-free.
- I can't withdraw my earnings income tax/penalty-free until 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.
TLDR: 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 additional earnings without paying taxes or penalty fees until I'm basically 60! 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 more near term? Maybe invest in myself so I can increase my earning power, which is a much higher return?
(5) Invest in myself
School can only take you so far. In today's world, it's becoming easier than ever to pick up new knowledge and skills. That means competition is fiercer and expectations are higher, and you have to keep up or you'll fall behind. But that also means you have an opportunity to beat your competition and increase your earning potential.
We're also all still trying to figure out what we want to do for our careers. Professional and even hobby exploration can speed up that process.
By increasing my skillsets and soaking up more knowledge via online courses (via Coursera, Udemy, Udacity, etc.), I could: (1) Increase my earning potential; (2) Better understand my interests and passions.
TLDR: I may seriously consider prioritizing that data science certificate from Udacity and that photography class over paying off debt like student loan interest. It could lead to higher salary potential, and I could even use my newfound photography skills to earn some extra money. Investing in myself could end up returning way more than my debt costs, thus making it a better use of my money.
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 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. 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 pile up. And many friends will head off to different places. If I don’t make the most out of my college years, I’d regret that more than anything else down the road. These experiences can create lifetime memories, help me strengthen friendships and meet new people, and allow me to explore more and grow as a person.
TLDR: 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 and next school year's expenses, among other random things.
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.
Setting money aside 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 or professional development, because they're simply more motivating! I hear this app called Pluto Money is awesome for that. 🚀
Alright, gotta run back to work before my boss yells at me. ✌️
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