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5 Mistakes That Students Make with Their Summer Paychecks

Samantha Rose
Samantha Rose is a personal finance writer covering financial literacy for OppU. Her work focuses on providing hands-on resources for high school and college-age students in addition to their parents and educators.
Read time: 8 min
Updated on February 14, 2022
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Is summer cash filling your wallet? That’s a good thing—maybe.

Summer break is here! And after some much-needed R & R, many students will be starting another seasonal tradition: the summer job.

With paychecks that dwarf academic-year earnings, even part-time summer positions can provide a nice influx of cash. Depleted bank accounts will be refilled, but with an abundance of funds comes the temptation to spend.

Looking for ways to put your money to better use? Here are five common mistakes that students make with their summer paychecks—and five ways to avoid them.

Mistake #1: Spending First and Earning Later

When students land a summer job, they begin to muse about all the things they can use that future income to buy. Josh Hastings, founder of Monex Life Wax, warned that it’s tempting for them to start spending immediately—even before their first paycheck.

“When you work hard for your money during the summer months, make sure you don't use the 'spend first, earn later,' approach,” Hastings warned. “Knowing you will be earning some money during the summer, some students will plan trips and other fun events with their money—not taking into consideration they could use the money to save for the upcoming school year.”

“Instead of taking out a student loan to cover the year's rent, why not save up $4,000 to cover college rent and avoid the student loan?” Hastings asked.

This is a great point. Experts recommend that you save at least 20 percent of each paycheck. Fifty percent should go toward needs and the remaining 30 percent is left for wants. Considering that most students likely have fewer expenses and debts than older working professionals, bump this number up.

Hastings urged students to make sure they’re paying themselves first with their summer paychecks.

“Creating sound financial habits at an early age will always go a very long way down the road,” he said.

Mistake #2: Not Starting an Emergency Fund

College students need an emergency fund, much like everyone else. Even if college students don’t have many expenses and are likely relying on their family, financial aid, or a summer income, it’s still responsible to save up for the unexpected. Because let’s face it, the unexpected is going to happen—it’s just a matter of time.

Victoria Lowell of Empowered Worth suggested that students use a portion of their summer paycheck to start an emergency fund. This fund will ensure that students have money to use in dire situations, like a medical or educational cost.

“I suggest placing a portion, usually 10 percent, into an interest-earning account to begin to create an emergency fund,” she said. “A good credit rating and more liquidity are things that college age adults should prioritize.”

If you haven’t yet, open a checking and savings account. Many employers offer direct deposit so you can set up your summer paycheck to deposit into your preferred bank account. Then, set aside a portion for an emergency fund, whether that lives within your linked savings account or a separate high-yield savings account. Getting into the habit of saving up an emergency fund now will create healthy financial practices in the future.

Mistake #3: Starting a Retirement Fund Too Early

Here’s a question you probably haven’t pondered. Should full-time students start a retirement account? It turns out that this is a question that comes up frequently from both students and their families. Although experts have differing opinions, the consensus is mostly no.

“I often get calls from clients asking what their college-age children should do with their summer paychecks,” said Lowell, adding that “the first thing that comes to mind now that they have earned income is setting up a retirement account.”

“My suggestion is that they hold off for now,” she said. Her reasoning? “A retirement account will tie up these funds for about 30 years before [students] can access them penalty free, excluding certain situations.”

Students should wait to start contributing to their retirement funds after graduation, when they’ve secured a steady income. Maybe their company will even offer an employer matching program. In the meantime, summer earnings are better used for immediate educational expenses, like lessing student loans or paying off credit card debt.

“These monies should be used to first pay off any credit card debt they may have incurred during the school year,” Lowell said.

Mistake #4: Not Investing Money and Time Into Professional Development

Professional development can begin well before graduation and entering the workforce. This summer, students should consider spending time learning outside of the classroom. If not, it’s a missed opportunity for personal, professional, and financial gain.

According to Tom Dolfi, head of marketing in education technology, many students regret leaving professional development to the last minute or after graduation. Dolfi works with students who expressed disappointment at not developing “transferable knowledge and hard skills” about topics that are popular but not taught in their classes.

How can students build up their skills and ultimately their resume? Luckily we’re living in a time with endless possibilities to self-guide your side learning.

Students can take things like “online courses in order to become more proficient in using specific software (most of the times, the Office suite, Adobe suite of very industry-specific software),” said Dolfi.

Check with your university to see if they offer free or discounted software programs to their students. Then, browse the web to find free online courses to learn how to use the program. For instance, if you’re interested in learning how to code with Python this summer, watch a few technical videos through Codecademy. Alternatively, spend some of your summer money on an online course at a university or professional program that’s not offered at your home institution.

Other students may be interested in “attending workshops and networking events to connect with professionals working in the sector they are interested in,” Dolfi said.

Tap into your school’s professional and alumni network. Oftentimes the professional listserv will include a calendar of inexpensive networking events geared toward students in specific cities. Don’t be scared to reach out to a connection for career advice over a coffee introduction. A good rule of thumb is that you can’t predict where one introduction can take you, so put yourself out there. One friendly introduction can lead to another which can lead to an internship or job opportunity.

Mistake #5: Blowing Extra Money on Fun Instead of Investments

Quick scenario: Let’s say your educational costs are entirely covered by some combination of financial aid, grants, scholarships, and savings. No student loans. Hurrah! There’s even extra savings for an entertainment budget and a cushion for an emergency. What do you do with your remaining summer paycheck? What a dilemma, right? Well, according to Robert Farrington, the creator of The College Investor, you shouldn’t spend it on frivolous things. Rather, invest it and reap the benefits in the future.

Farrington suggested that a student who made $1,000 and invested it—while doing nothing with the initial investment—would potentially have around $13,000 in 40 years.

“Investing is a great way to save for the future, as long as a student is responsible and disciplined,” he said, adding that “[i]t doesn't require a huge up-front investment, and it doesn't require a lot of time or effort.” In fact, “[a]ll it requires is a small tolerance for risk, a dedicated time horizon, and an up-front time investment of an hour.”

We’re not necessarily talking about a traditional retirement account (401k or Roth), but if you find yourself in this ideal scenario then maybe you are the 1 percent who should consider investing for retirement. Investing can take any form, such as short-term certificate of deposits or long-term real estate holdings. Yes, even students (so long as they’re at least 18 years of age) can invest on their own.

“The big reason to start investing while in college is TIME,” said Farrington. “The earlier you start investing, the more time your money has to grow.”

The hardest part is changing your mindset to be patient and look toward the future. “It's not sexy to see your $1,000 investing grow to just $1,080 by the end of the year,” he said. That measly $80 is discouraging to say the least. “But where you really see the gain is in the future.”

“By starting to invest at age 18 versus age 30, you have a 12-year lead over starting later in life. If students can get started investing at 18 years old, they only need to invest about $2,100 per year to be a millionaire by age 62. That number starts to go up the older you get. If you wait until 30, that number becomes $6,900 per year you need to invest—over three times the amount per year. All because of time.”

Why is it that time is the deciding factor in investments? It all has to do with compound interest, said Chase Lawson, author of “Financial Freedom.”

“Compound interest is an often-talked-about topic. It relates to building interest on top of interest, thereby creating a snowball effect and leading to a much larger future value than would be achieved with simple interest. The earlier you start to invest, the more of an impact compound interest will have, due to having a larger time horizon to experience the effects of it.”

This means that “students should start a habit of saving earlier in their lives,” Laswon said. Saving and investing is often an afterthought, but it shouldn’t be. “After all, your younger years will have a larger potential impact on your future net worth than you might otherwise believe.”

So, if you find yourself in this ideal situation with minimal expenses, then use your extra cash to invest in your future. “With so few expenses, this is the perfect time to start saving money,” he said, adding that you should “[u]se this time to build good habits and take full advantage of all the time you have left.”

Bottom Line

After a demanding school year, summer is a time for fun. But wise money management will pay off down the road. With a little planning, students can avoid these common mistakes and take critical first steps toward building financial health.

Article contributors

Tom Dolfi is the head of marketing at Pathfinder, an edtech startup based in London. Pathfinder uses AI (machine-learning, data science and natural language processing) to power their career development platform and help students achieve their career goals. You can find him on LinkedIn.

Robert Farrington is the founder of The College Investor, which he started to showcase a variety of common sense personal finance and investing ideas to help millennials get free of their student loan debt and start building wealth for their future. He has had a passion for investing and all things related to personal finance since he can remember. When he was about 13, he even made enough income to pay taxes on. While in college and graduate school, he realized that most people were oblivious to investing and personal finance, even MBA students, so he ended up helping many of his peers. It was apparent that the number one dilemma holding back millennials from investing and building real wealth is student loan debt. This led him to write “Student Loan Debt: Getting in Smart, Getting out Painlessly."

Josh Hastings

Josh Hastings is a former high school athletic director at the secondary level who shifted his focus in 2016 to focus more effort on his entrepreneur endeavors. In 2017, he founded, a personal finance site dedicated to helping millennials with student loans. With an emphasis on money and finance behavior, Josh started Money Life Wax to help millennials realize there are other ways to make money and be happy in the 21st century. You can find him on Facebook.

Chase Lawson is a graduate of Clemson University where he received bachelor of science degrees in accounting and financial management and a master’s in professional accountancy. While in school, he ran a successful six-figure business while helping coach and lead fellow college students. Finance has always been a focus of his, having started investing at a young age, and he is passionate about helping others achieve financial independence. He’s overcome over $20,000 of personal debt and a credit score in the 500s to become a homeowner in Austin, Texas, with multiple income streams and a credit score in the high 700s. He’s the author of a personal finance book, “Financial Freedom: Breaking the Chains to Independence and Creating Massive Wealth."

Victoria “Vicky” Lowell is a financial educator dedicated to empowering women with the knowledge to become active participants in the planning of their financial future and well-being. While engaging in frank, open dialogue with women in the community, she came to realize the importance of educating women about their finances. To that end, in addition to financial planning, she enhanced her knowledge of the immediate and long-term financial implications of divorce as a Certified Divorce Financial Analyst® (CDFA®). In late 2018, she left UBS to follow her passion of helping women assert themselves fiscally and founded Empowered Worth, a resource for financial coaching geared toward educating women to not only meet their immediate economic needs but attain long-term goals. She provides the tools needed to empower women of all ages.

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