The time value of money concept is one of the most important factors individuals face when it comes to investing assets. Time value of money is the idea that money available today is worth more than the same amount of money available at a future date, because of interest earning potential.
Let’s say you are offered $100 today, or were given the opportunity to collect $100 one year from now. Would you take the money now, or later? Your best option would be to accept the $100 today, because of interest earning potential and opportunity cost.
Taking the payment today would allow you to invest your money in a savings vehicle like a savings account or money market account. Investing your money allows you to earn interest, meaning the bank is paying you a small percentage for using your deposited funds. Therefore, depositing your money in a savings account will allow your money to grow every year.
Going back to the example, the opportunity cost of choosing to defer a $100 payment today is the interest you could have earned through investing your money. Opportunity cost is a trade-off between what you chose and what you could have had. For instance, if you pay $10 for a movie ticket, your cost of attending the movie is not only the $10, but also the time and value of what you could have enjoyed doing instead of going to the movie. That being said, when choosing to spend or save your money, it is important to think about the opportunity cost of your decision, making sure that the benefits outweigh the costs.
The main idea of the time value of money is that as a young investor, you should start saving as soon as possible! The sooner you invest, the higher your interest earning potential, and thus, the more likely your money will grow over time.
Written by Jessica Wesser, Financial Wellness Peer Educator, University of Illinois Extension
Student loans are a common and convenient source of funding used by more than half of the students at the University of Illinois to help pay for their education. Many students do need to borrow and consider this a wise investment in their future. Before borrowing a student loan, consider this important information:
- Borrow only what you need and can reasonably repay.
- Develop a realistic budget and consider ways to lower your costs.
- Research the average pay of your chosen field to know if your projected earnings will be enough to repay your student loans.
- Keep track of your loan debt (principal and any accrued interest) so you will know the amount you will have to repay.
- Know that repaying your student loan on time can help establish and maintain an excellent credit history.
- Be aware that student loans are in your name and affect your credit history, so you should know and understand the obligations.
- Unlike other forms of consumer debt, student loans cannot be discharged through bankruptcy except under extraordinary circumstances.
- If you fail to make a payment on your student loan for an extended period, your loans may be placed into default.
- A default on a federal student loan will require payment of additional costs, including collection costs, attorney’s fees, court costs, and additional interest. These costs may substantially increase the amount owed on your student loan.
- No statutes of limitation apply to the collection of federal student loan debt. This means that your student loan debt may be collected many years, or decades, into the future.
- The IRS may seize your tax refunds to repay a defaulted federal student loan.
- Your future wages may be garnished to repay a defaulted federal student loan.
- Your Social Security benefits may be garnished to repay a defaulted federal student loan.
- Any disability benefits you receive may be garnished to repay a defaulted federal student loan.
- A default on a federal student loan may result in the denial or revocation of a professional license, such as a license to practice medicine or law.
Written by Josh Keen, Office of Student Financial Aid
Looking for more financial information? Check out GradSense.org, an engaging and comprehensive resource developed as a collaboration between the Council of Graduate Schools and TIAA-CREF.
In addition to highlighting trends and developments in topics related to student finances, such as student debt and taxation issues, GradSense features a host of useful tools and infographics. Use these resources to understand what your degree may be worth, how long it may take to repay your student loan, or what salaries you can expect to earn from different careers.
GradSense recently underwent a facelift, so you’ll easily find relevant articles and links highlighted on the homepage. You’ll also find resources from their university partners on the homepage, which includes the University of Illinois.
Take some time to explore GradSense and see what it has to offer!
Written by Laura Spradlin, Graduate College
Tax Break for Higher Education
Paying for college or any kind of post-secondary education can be expensive. Fortunately, our income tax system has credit, deductions, and other tax breaks for higher education. Check out this resource to see if you’re qualified for any of these tax breaks.
One of the most common mistakes made by college students is that they think they are not required to file their income taxes–some students don’t even know if they have to file or not. The answer to this question is based on the word “income.” The student has to ask him or herself if they have earned any income. If the student is a single dependent and the total earned income for the year was less than $6,100, the student is not required to file their taxes. That doesn’t mean the student shouldn’t file; it just means they don’t have to. The reason why the student should probably file, even if their income falls under $6,100, is because they may get back all or some of the money that was withheld (IRS.gov covers this in more detail). If the student does file, it’s important to avoid mistakes. Mistakes slow down refunds and draw attention to you with the IRS.
Another common mistake is claiming the wrong dependent status. If the student’s parents are already claiming him/her as a dependent then the student should not make the mistake of claiming themselves as a dependent.
Also, many students miss out on education deductions. Whoever pays the student’s tuition (including themselves) can claim certain education-related deductions including those for tuition and fees.
Lastly, some students fail to account for dual state income. If you live in one state, attend school in another, and work in both, you will have to account for the income (and taxes paid) from both states. For example, a student may live in Wisconsin but attend college at the University of Illinois at Urbana-Champaign. Since she is a resident of Wisconsin, she will have to claim all of her income there, including the income from Illinois. However, she will get a credit for taxes paid on income in Illinois.
Written by Cindy Garcia, Financial Wellness Peer Educator, University of Illinois Extension