Finance Blog: Top 3 basics for personal finance

If there is one thing that all university students have in common, it’s a love/hate relationship with procrastination. Putting off working on an assignment that’s due in two weeks may not be a big deal, but putting off learning how to properly manage your finances could be far more damaging. There is a lot to learn on this subject, some things more important and some less. Below is a list of the three crucial topics that are worth learning about.

Know and improve your credit scores

The first step to take is to find out what your credit score is. This can be done quite easily using services like Credit Karma or MOGO. At this point you’ll likely be surprised that your credit score is even less than your bank account balance. Pause, take a breath—you still have time to fix things.

At this point, some people decide that they are better off avoiding all debt for as long as possible. While this is certainly preferred to raking up mountains of debt with no hope of paying it off, it is not the best strategy. The problem with this approach is that if at any point in the future you wind up needing to borrow money, you may not be able to. Even if you do manage to find someone willing to give you a loan, the interest rate you’ll be required to pay on your debt will be far greater than it would be otherwise.

So, if avoiding debt altogether isn’t the right approach, then what is?  

You should pay off your credit card as quickly as possible to increase your credit rating and reduce the amount of interest you are paying. A good goal is try and pay off your full credit card bill by the minimum payment due date. As mentioned earlier, this is going to save considerable sums of money down the line, that is, unless you plan on purchasing your dream home in cash.  

Another benefit to using a credit card for your purchases is that it can give you the ability to build up rewards. Each time you buy something using your card, you receive reward points. The details of what exactly you can use these points for vary from card to card, but as long as you pay off your debt immediately to avoid paying interest, you’re getting something for nothing.   

Make compounding interest work for you

A famous quote commonly credited to Albert Einstein says, “Compound interest is the eighth wonder of the world. He who understands it, earns it . . . he who doesn’t . . . pays it.”

The basic concept of compounding interest is this: say you invest $1,000 in a stock that pays a 10 per cent dividend. The first year you get $100. If you turn around and reinvest this money, the next year you will get $110 in interest. While the effects of compounding interest may seem trivial at first, over the long run, it has an enormous impact.

For the above example, reinvesting your money in order to take advantage of compounding interest turns your original $1,000 into $45,259.26 after 40 years.

If you do not reinvest the interest payments you receive and rely solely on simple interest, after 40 years, that original $1,000 grows into a mere $5,000.

Therein lies the beauty of compound interest. Unfortunately, this phenomenon can be used against you as well. When you let your credit card debt build up, or any debt for that matter, the awesome power of compounding interest increases the amount you have to pay back the same way it did for your savings in the prior example.

Manage your tax burden

First, you should make sure you know how to properly prepare and file your tax returns. This is an area that is woefully neglected in high school education, so it is up to you to make sure you are properly informed. Here are some areas worth noting:

  • Some deductions are available to students—i.e. tuition, books, etc.
  • File before the April 30 deadline, especially if you owe money to avoid penalties and interest.
  • Declare scholarships and OSAP loans, regardless of whether they are taxable or not.

One interesting feature of tax law which merits discussion is the fact that charitable and political contributions can be written off in part against the money you owe in taxes. While making charitable and political contributions won’t save you any money, it does allow you to direct your dollars towards specific causes you believe in rather than just giving it to the government at large.

The time to start saving is now. The time to start learning about personal finance was yesterday. Go get it.