According to the 2019 Financial Literacy Survey, less than half of Americans say they have a budget and keep close track of how much they spend on such things as food, housing, and entertainment. For students interested in improving their financial literacy, Prof. Vicki Bogan, business, and a member of Cornell’s Financial Literacy Coordinating Committee, hopes to offer some useful insight.
“In college, I think this is one of the first times where you have a little bit of freedom in managing your own finances and budgeting … and so starting early kind of leads you to develop very good habits that I think are very important long-term,” said Bogan.
However, certain barriers exist that can make it difficult for people to consistently practice financial literacy. “Tracking and understanding how much you spend can be really difficult,” Bogan said, especially with the presence of technology.
“Students get into the habit of just swiping and [putting] everything on a debit card, or your credit card, or your Big Red Bucks, and you are not as conscious of how much money you’re actually spending,” Bogan said
Additionally, when it comes to managing finances, some students have a backstop which can keep them from developing financial responsibility early in life: their parents.
“If you put too much money on your credit card, who pays your credit card bill?” said Bogan. “If it’s you, it’s different than if it’s your parents. And sometimes your spending behavior can be a little different if you know in the back of your mind that there’s a safety net.”
For students seeking resources to help them develop strong skills in financial literacy, Bogan recommends Cornell’s personal finance website, which offers information on budgeting, saving and financial aid.
Students can also attend on-campus workshops on financial literacy, which Bogan offers to students on an “ad hoc” basis. Earlier this year, she organized a workshop titled “What Every College Graduate Should Know About Personal Finance” for a business fraternity on campus.
One essential aspect to developing financial literacy is learning how to budget and be conscious of spending. “The important thing for budgeting is … understanding what your cash flows are,” Bogan said. “How much money is coming in? How much money is going out? Once you understand what your financial picture is then you can be smarter about budgeting.”
For students interested in building healthy saving habits, “Slow and steady is the best advice,” Bogan said. “You’re not going to be able to save up a million dollars in a year,” but it’s important to “make a habit of savings.”
“Think about paying yourself first… Whatever your income is, you put a specific percentage of that away in some type of savings vehicle. And you don’t have to do it all at once, but just make a habit of it, and keep doing it every paycheck.”
While learning effective ways to budget and track spending is essential for anyone interested in improving their financial literacy, for students looking towards graduation, Bogan also have specially tailored advice.
“If you’re working for a company, make sure that you sign up for their retirement plan and make sure that you start your retirement plan as soon as possible,” Bogan said. “If you have a 401K, contributing to that is really helpful because generally if you put in a certain amount of money, most companies will match that. If you don’t put in any money, they’re not going to put in any money either. And so you don’t want to forgo that employee benefit.”
For students interested in investing, Bogan said it might be a good idea to get a financial planner who can “help you think strategically about what your financial goals are” even when one’s financial goals change over time.
When considering a financial planner, Bogan notes that it is important to find ones that are fee-based, instead of commissions-based, as the latter would be more likely suggest financial products based on “how much they’re going to make.”
When choosing to invest, Bogan highlighted the importance of low-cost investing and diversification. She said that it can be easy for students to exercise “familiarity bias with a particular firm,” but having investment portfolios too concentrated in a particular company, stock or bond can be risky.
“It is much better to diversify your risk across a host of different assets,” Bogan said. “Mutual funds are a great way to invest in equity markets in a diversified way, with a low transaction cost and low entry fees.”
Besides diversification, Bogan emphasized the value in understanding what types of products you are investing in.
While “people [usually] have in their heads that bonds are very safe investments,” Bogan said, “there are certain types of bond sectors that can be very risky.” Therefore, “understanding the products in which you invest is really key.”