It's possible to save money during your college years—and pave the way for a sound financial future.
Saving for your future while in college may sound totally impossible, especially with budgeting and paying on student loans. But college is actually one of the best times to form responsible savings habits that will benefit you long after you graduate. Here are six strategies to help you start saving.
1. Save early and often.
When you are young, you can take advantage of years of compound interest. Compound interest is when you earn interest on the money you've saved as well as on the interest you've earned.
2. Set up an automatic payment—to yourself.Think of saving money as another monthly bill you need to pay; you're just paying yourself instead of someone else. Commit to saving a certain amount (even a few dollars) each month. Then, set up an automatic transfer into a savings account so you won't be tempted to spend the money.
3. Create an emergency fund.
Your first savings goal should be to set up your emergency fund to cover unexpected expenses like car repairs and medical bills. Financial experts usually recommend putting aside up to three months of rent and expenses, but even one month is a good start.
4. Establish some short-term and long-term savings goals.While you might not be ready to start saving for retirement or a house, you will want to save for other things in college. Once you've established your emergency fund, start to identify your goals and how long it will take you to reach them. For example, you might want to buy a new phone in six months, study abroad in two years, or start graduate school in six years. Some people open a separate savings account for each goal.
5. Make it difficult to access your savings.Chances are, you will be tempted to rob your savings account for non-emergency purchases, but try not to. The longer your money stays in the account earning interest, the faster it will grow. Some financial experts suggest keeping your savings at a completely different bank, in an account not connected to your checking account or easily accessible with a debit card, so you are less likely to withdraw or transfer the money.
6. Choose the right kind of savings account.Savings accounts have different interest rates, service fees, and rules, and some are better for long-term savings than others.
A regular savings account earns the lowest interest, but it offers easy access to your money. You can withdraw cash with a debit card and transfer funds into your checking account. A regular savings account is best for an emergency fund, because you want to be able to withdraw the money easily with no penalties.
A money market account typically earns more interest than a regular savings account, but also has higher balance requirements, ranging from $500 to $10,000. You can usually access your money with a debit card and write checks from the account, but if your balance goes below the minimum, you'll be charged a fee.
A certificate of deposit (CD) usually has the highest interest rate of all savings accounts, but also has more restrictions. Mainly, you can't withdraw the money in a CD for a certain period of time (called a "term") without a penalty. Terms range from three months to five years, with longer terms paying the highest interest (meaning more free money!). Minimum balances range from zero to $2,500. CDs and Money Market accounts are best for saving money you don't plan to use for several months or years.
Learn more about saving for the future by checking out What 20-Somethings NEED to Know About 401(k) Retirement Plans.
Need other smart ways to save for the future? Check out What You Need to Know About 529 College Savings Plans!