If you have children leaving college, hopefully, A-level results day went to plan! If they are going to university, those next few years away from home will shape the rest of their lives. But, if they make some obvious financial mistakes, it could also negatively affect their job prospects and their ability to buy a home.
With students already under immense pressure, a recent Which? survey consisting of 5,000 undergraduates found that, worryingly, to manage daily living costs;
- 46% said they have had to turn to ‘the bank of mum and dad’
- 20% had to use their overdraft facility
- 10% admitted relying on credit cards
Overall, 31% of students said that money worries have negatively impacted their mental health. So, what can we do to alleviate this unnecessary anguish?
The root cause
A study called The Ticking Time Bomb of Generation Debt consistently identified the causes of debt and financial uncertainty among young people to be a result of;
- Schools failing to provide more information and guidance
- Uncertainty around necessary borrowing, such as student loans
- A need for more responsibility to be placed on young adults, with parental support, to manage their own finances
Incredibly, financial education only became part of the classroom in September 2014, as a small component of the Citizenship Key Stage 3 and 4 curriculum. Sadly, it’s widely overlooked. There are five key areas outlined to be taught at Key Stage 4 and the headlines are relevant at any age. You might want to share the guidance below with those leaving the nest in the coming weeks.
- Income and expenditure
As the statistics from Which? show, income doesn’t always exceed expenditure. To minimise these situations when budgeting, there are three distinctions to make; wants, needs and unexpected costs. Do you really need the Starbucks on the way to Uni?
Try to avoid impulse purchases and plan in advance. When food shopping, make a list; supermarkets and their websites are designed to maximise your spend at each visit, without a plan you might find your basket loaded with special offers you don’t need or that aren’t so special!
Your biggest (and most important) expenditure is going to be rent, but helpfully the price of student accommodation usually includes utilities such as electricity, heating, water and internet. Always double check this, especially if you are renting from a private landlord, as you may have to organise your own bills. No matter what the bill is; always pay them on time to avoid additional late fees or a credit reference crisis.
- Credit and debt
It’s simplest to think of credit and debt in terms of a current account:
- Credit is a positive balance, known as ‘in the black’
- Debt, or ‘in the red’ is a negative balance when you’re overdrawn (the colour references come from accountancy; minus figures are written in red pen)
When planning the journey to university, there are a few key debt matters to consider;
An interest rate is the amount charged, expressed as a percentage of the principal sum, by a lender. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR).
The actual terms of a student loan can be quite complex, but ultimately will it ever be repaid? You get funding towards tuitions fees (currently up to £9,250 a year) and living costs, but student loans expire after 30 years. An estimated 60% of students will never pay the whole loan back. For this reason, it might be worth you still taking out a student loan in preference to your parents funding these costs on your behalf. The loan could always be repaid at a future date as a parental gift if it was their intention to pay for all costs.
Repayments work more like a tax than a traditional loan repayment for those with a student loan; taking a small percentage of your income after certain income brackets are exceeded when you are working (earnings exceed £1,527 per month gross). The interest rate offered may not be competitive compared to a high-street bank (it is currently 6.3%, RPI + 3%), but due to the unlikely nature of ever repaying the whole sum, it could be the cheapest money you will ever borrow.
A planned overdraft lets you withdraw money beyond £0; it gives you some breathing space, which could prove a lifeline if you’re waiting for your next student loan instalment.
Most student accounts come with a 0% interest overdraft (meaning you don’t pay any interest on what you borrow) up to a certain amount, increasing annually throughout your education. Different banks offer different maximums but remember that ultimately it will need to be repaid.
Your credit score
When you apply for credit typically lenders will run a credit check on you to calculate risk. By looking at your application and borrowing history they will decide how likely you are able to repay what you borrow.
A poor credit score is very likely to affect your chances of renting a property, getting a mortgage, or even obtaining a mobile phone contract. You can check your score for free, or in more detail if you pay, with credit reference agencies like Experian and Equifax.
Think twice before applying for credit as each check is recorded and often detrimental to your score. Registering to vote will help improve it, but the absolute golden rule: Always make your repayments on time. Failure to do so could damage your ability to get credit, including a mortgage, in future.
You might be heading to university with more valuables than you may realise; your phone, laptop, iPad, household goods, clothing, jewellery… the total value will quickly run into thousands of pounds. Make sure you have adequate and appropriate cover to protect your possessions against situations such as, but not always including; fire, theft, flood, loss or accidental damage.
Some of the key terms you’ll need to understand are:
- Term; how long the insurance policy lasts for (usually a year)
- Premium; The amount you pay for insurance cover, either annually as a lump sum or monthly (which is usually a little more expensive)
- Excess; the amount you’ll need to contribute towards a claim. Most policies have a compulsory excess, but if you choose to pay a higher excess your premium will be lower
- No claims discount; for every year you don’t claim on an insurance policy you may receive a discount on the next year’s premium
- Exclusions; things and situations your insurance will not cover. Make sure you understand what is and isn’t insured
It’s good practice to review your policies every year; the value of your possessions are likely to change and it’s worthwhile to shop around for a better deal.
- Savings and pensions
It may not be easy to save at this point in life, but if you have any spare income, get into the habit now. A rainy day fund for unforeseen costs will minimise the risk of getting into debt. There are lots of different savings options available, ISAs for example; if you’d like to discuss them in more detail, get in touch.
You’ll be surprised how much you’ll need to save towards retirement. Unfortunately, the state pension is often not enough alone to support you in later life. When you begin to work contracted hours you’ll be automatically enrolled in a Workplace Pension that your employer will pay in to as well as you. It’s effectively free money, so worth accepting at every opportunity. Again, if you want to find out a bit more detail on pensions, we’re here to help.
- Financial products and services
As a student, you can receive discounts in various retailers, usually 10% on the high-street, but it’s always worth asking. Register with UNiDAYS online and you’ll receive student discount on everything from fashion, food, gym membership, electrical goods and holidays.
No, not the Italian restaurant, but there is currently up to 40% off your bill as a student using a student card! It’s the golden rule; if you’re not sure about something, just ask. There’s plenty to focus on and distract you (in a good way) at University. If you manage your finances well, money worries shouldn’t impact your experience and education. We hope you enjoy it.