Budgeting for students

Shakespeare’s advice “neither a borrower or a lender be", might have worked in the 1600s, but in Canada today, you need to borrow, and budget, to graduate with a grip on your finances

Ruth Saldanha 29 August, 2019 | 1:15AM

Student with books

This week, thousands of students all over Canada, are heading off to school again. Several are first time college or university students – and many are also leaving home for the first time. They probably have a bunch of things on their minds – classes, friends, homesickness – and money.

School costs money – quite a bit of it. Students who are living independently for the first time this year will need to deal with things they might not have had to in the past, including housing, food, rent and entertainment, apart from studying. And for many, there is the worry of rising student debt, which could lead to financial worries later in life.

A Hoyes, Michalos Bankruptcy Study states that student debt in Canada is in a crisis. “We say this because we see the negative consequences of more and more young people taking on student loans, in higher amounts.  In 2018, student debt contributed to more than 1 in 6 (17.6%) insolvencies in Ontario,” the report said.

This isn’t to say that all students will sink. But all students should try to get a handle on their finances, and the first thing to do is to maintain a budget.

“The best way to limit overspending and keep savings on target is to craft a budget and adhere to it,” says Christine Benz, Morningstar’s director of personal finance.

“Becoming more independent often means paying for more things with your own money, like food, clothing, and housing expenses. It’s important to put these things down when it comes to spending your money. They should be at the core of your budget,” says Morningstar’s director of investor education, Karen Wallace.

You can never start too soon, and students should have a definite budget plan to avoid financial shocks later.

How to make a budget?

“You can't create a budget without first getting a realistic view of your income, spending, and savings patterns right now. After analyzing that information, you can then formulate a budget that takes into account your income and any adjustments you’re willing and able to make to your expenditures,” Benz says.

To begin with, Wallace recommends that you first make a list of all expenses – anything on which you will spend money.

“Put the things like housing; food (within reason here—groceries, not fancy restaurants!); insurance premiums; utilities; and debt payments (auto loan, student loan, credit card bills) first”, she suggests.

Once you do that, total this up and subtract it from your income. What you have left over is the “discretionary” part of your income – that you can spend as you like.

“Other things you buy during the month--like entertainment, gifts, and some types of personal care--have to fit within this part of your budget. If there’s not enough money to go around each month, these can be good places to cut back,” Wallace suggests.

Benz suggests you aim for your budget to reflect your spending aspirations and priorities. For example, perhaps you'd like to spend more on experiences and less on material goods.

Research into personal happiness indicates that people who spend on experiences, not things, are more content overall. If so, you'd want to leave your travel expenses untouched--or possibly even boost your planned expenditures there--while cutting back on categories like clothes, home furnishings, or even your outlay for automobiles,” Benz says.

Which is not to say that the same rules work for everyone. The beauty of a personal budget is that it is personal, so you can decide what matters most to you.

One and done?

It is also important to note that budgeting is not a one-time thing.

“I think all budgets should be evolving, because everybody’s circumstances change,” Wallace says. Students, for instance, could get a higher-paying job, or a second job, or perhaps get assistance that reduces overall expenses. Any change in financial circumstances should reflect on the budget.

“Factor in your new salary and make sure you are spending your newfound cash in a smart way that will help you reach your goals,” Wallace says.

Let’s say you decide that you should really use part of your raise to save more for retirement or pay back debt. Set that up in your budget, then set it up in real life by directing a bigger portion of your pay to a retirement account, or debt repayment. 

Careful with credit

In Shakespeare's Hamlet, Polonius advised his son Laertes "neither a borrower or a lender be."

“It's good advice, but I'm betting University didn't cost as much in Denmark in the Middle Ages as it does in Canada nowadays. Joking aside, though, most University grads start their careers with student loans to pay off,” Wallace says.

But apart from student loan, many students get easy access to credit cards as well, because credit card companies love new students. If there’s one piece of advice you should absolutely follow, it’s this one: Be very careful with credit cards.

“Seeing how little cash you actually have to work with every month makes it easier to understand the temptation to rack up credit card balances. Resist the urge! Credit cards offer great convenience -- not only do they save you from lugging around a big wad of cash, they offer a grace period where you don't accrue interest on purchases so you can defer payment until the next billing cycle,” Wallace says.

However, all good things come at a cost, and credit cards have some of the most expensive costs out there. Wallace points out that most basic credit cards charge an annual percentage rate of around 20%, and store cards can charge as much as 30%.

“Paying off only the minimum balance is not a smart strategy. Minimum payments typically consist of the interest owed plus a nominal amount like $10 or $15. Let's assume you have a $5,000 balance, and you pay the minimum payment every month -- say, $10 plus interest. At a 20% interest rate, it's going to take 41 years and nine months to pay that off -- and when all is said and done you will have paid nearly $21,000 in interest”, she says.

So be smart, create a budget and be careful with credit. And remember, enjoy school!

About Author

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca