This is a guest post from Laura of Green Panda Treehouse. Laura is a twenty-something woman working to improve her finances and reduce debt. She writes about personal finance for college students and grads at Green Panda Treehouse. Be sure to subscribe to her feed so you can get more great content from her.
Some college students in the next few months will be getting some money from their university. After their tuition, room and board, and books have been paid for, there may be money left over from your scholarships and grants. Your tuition refund is a fantastic way to start an emergency fund painlessly.
How much do I need in my emergency fund?
It depends on your circumstances, such as if you’re a single student with little expenses or if you’re going to school while working and taking care of a family. The more responsibilities you have, the more reasons you should have a healthy emergency fund.
Ideally you should have 3-6 months of necessary expenses in your emergency fund. Remember you need the money to cover essential expenses like food, rent, gasoline, utilities, etc. Also include money for items such as possible car repairs and semi annual insurance bills.
Since you’ll need this money in an emergency quickly, consider using a savings account. Don’t put your emergency fund money into the stock market, where returns in the short term are volatile.You need this to be safe and free from you spending it. Many banks have high interest saving accounts you may want to consider. You want this money to grow without putting it at risk.
If you’re currently working while attending college, have a portion of your paycheck transferred to your emergency fund. You’ll become use to the slightly small paycheck as you start savings. Along with your tuition refund, this money will increase your assets without causing a huge drop in spending money.
Build up the emergency fund to the point that if you lose your job, you can survive until you find a new one. If the unemployment problems continue, you may want to be an even bigger emergency fund.
Use it ONLY for emergencies.
I suggest reviewing your financial statements from the bank or using Mint to see what past emergencies have come up. You may see a trend of car related expenses, in which case, you’ll include that into your emergency fund planning. You may also notice that you didn’t have emergencies per se, but you failed to anticipate expenses and were caught off guard.
If you run into a real emergency, then pull just enough money out to cover it. Focus on replenishing it as soon as you can.
Do I pay off debt or use the money for savings?
If you have high interest debt, like credit cards, then tuck away a month’s worth of expenses away first from your tuition refund then go ahead and pay that debt down with the rest of your money. Every semester, repeat the process until you’ve paid off your high interest debt and then use the money to save towards your emergency fund goal.
What of I have no debt and I already have an emergency fund?
Fantastic job! You’re now in a position where you get to decide which goal to pursue next. I’d look at your goals in 5, 10, and 20 years. Depending on where you’re at now in the stream of things gives you an idea of what you should put your money towards.
Which of the following are you planning on doing?
- Start your own business
- Getting married
- Buying a car
- Buying a house
- Retire (early)
After you decided on what you’ll probably do, then see what would be the best step. If you plan on owning a home, start setting aside money to make a sizeable down payment. If you want to retire early, invest your money into an IRA. In general if your goal is in less than 5 years, save the money. If it’s longer, like 10 or more years, then invest.
I’d also recommend skimming 10-20% off the top and just splurge. Take a vacation or spend money on your favorite hobby.
How have you used your tuition refund?