Kudos to you for instilling lasting life lessons and values in your children. As the summer break wraps up and a fresh academic year beckons, it is essential not to overlook financial education, particularly for kids on their way to college. Engaging in candid conversations about money can guide your child’s lifelong attitude toward finances, potentially leading to financial prosperity in the future.
Understanding Money
Insights.CollegePulse.com, 2023
Financial literacy, while highly essential, is often neglected as a skill for young individuals. Sadly, a large number of high schools fail to provide financial education. The Council for Economic Education states that merely 21 states require high schools to include personal finance coursework, and even though there's been a recent upturn in this statistic, parents continue to shoulder the task of educating today's college-goers about money.1
While it's beneficial to impart basic money management knowledge, your children should also be exposed to more sophisticated financial literacy concepts. This may sound challenging, but it doesn't have to be. Here are some steps you can take to guide your college-bound children or grandchildren:
Financial Steps to Take With Your College-Bound Children
Starting with the fundamentals, such as banking and budgeting, can lay a solid groundwork for your children's financial stability. Consider the following strategies:
Adding up Confidence
Insights.CollegePulse.com, 2023
Step 1: Open a checking account for your child
Your college-bound kid may need access to cash, making it worthwhile to open a checking account for them. Even without steady employment or income, a checking account can come in handy for ATM access or monthly bill payments. Online banking and mobile apps have greatly simplified account management and your child will likely adjust quickly to these technologies (and may even teach you a thing or two!).
You might want to open an account that links to yours, allowing you to oversee your child’s balance and expenditure while they can't view your account activities. Monitoring your child’s account can help avoid accumulating overdraft fees by setting up alerts when the balance drops below a certain level, enabling you to promptly transfer funds from your account.
Step 2: Consider a Monthly Allowance for Your College Student
Think About a Monthly Allowance for Your College-Going Child Apart from the budget you have set aside for your child’s college costs like tuition, accommodation, and books, remember that there will be extra expenditures throughout their college tenure. These expenses can include transportation, apparel, personal items, and entertainment. According to the College Board, for the 2022–2023 academic year, these costs could range from $1,830 at private colleges to $2,200 at public universities. Yet, these figures might underestimate the actual costs, especially if your child opts for takeout over cafeteria meals.2
To manage these costs efficiently while teaching your child the value of money, giving them a monthly allowance could be a practical approach. It is essential to communicate the allowance's purpose upfront, defining the kinds of expenses it should and shouldn't cover.
Depositing a calculated amount into their account each month, communicating that they are responsible for managing their expenses, and emphasizing that they need to prioritize their spending if they run out of money before month-end, can teach your child valuable financial lessons.
Benefits of this approach can include:
- Introducing a limited income that requires making financial choices.
- Providing consistency and predictability in monthly cash flow, which can help alleviate financial anxiety.
- Allowing students to learn about managing monthly cash flow before entering the professional world.
- Offering an opportunity to practice budgeting skills that will be valuable throughout their lives.
While your child may not initially appreciate the fiscal discipline enforced through an allowance, they will eventually understand the importance of the structure you have provided.
Step 3: Encourage a Part-Time Job
Encouraging your child to take up part-time work can help them develop time management skills and provide additional spending money. It can also impart valuable lessons about responsibility and work ethic.
Step 4: Consider Student Credit Cards
Student credit cards, specifically tailored for college students with limited credit card experience, can offer cash-back rewards for good grades and lower annual fees. If you educate your child on using a credit card for minor purchases or emergencies and stress the importance of settling the balance fully each month, they can start building a credit score.3
However, credit cards are not a universal fit. If you feel your child isn't ready for a credit card, you can add them as an authorized user on your credit card. As a parent, only you can judge if a credit card might encourage unhealthy financial habits in your child, in which case it would be wise to steer clear.
A Real-Life Example
Consider the following hypothetical scenario shared by one of our clients. Last fall, as their eldest child embarked on their college journey, they took the following steps:4
- Set up a bank account for their daughter and linked it to theirs.
- Got her a debit card and a credit card from her bank in her name to start building credit.
- Made her an authorized user on one of their credit cards for emergencies.
- Showed their daughter how to monitor her balances and transfer money from checking to pay off her credit card.
- Helped her set up her own Amazon account with her credit card.
- Helped her set up her own PayPal and Venmo account.
- Helped her set up her own Uber account.
- Changed all of their passwords on their Amazon, Paypal, and Uber accounts.
- Scheduled an auto deposit of an allowance of $150 every other week (to mirror a typical bi-weekly payroll process).
- Clarified ahead of time what they would contribute to Spring Break, Sorority dues, excursions, and other potentially gray areas of expenses.
Overall, they found this approach to be successful, although some negotiation was required along the way. They learned a valuable lesson about not giving their daughter access to their credit card for emergencies, as it led to abuse. They subsequently shifted to having their daughter pay for everything on her own credit card, and if they agreed to cover an expense, they would transfer the money into her checking account. This adjustment resulted in fewer requests from their daughter.
Don’t Wait to Have the Money Talk
Even if your child is already headed to college this fall, it's not too late for important financial discussions to set them on the path to financial success. We hope you find these suggestions and real-life examples useful. Implementing these measures can prove greatly beneficial for your children in the long run. Remember, we are here to help. If you have any queries or would like us to meet with your college-bound child, don't hesitate to get in touch.
1 MoneyRates.com, June 6, 2023
2 CollegeData.com, 2023
3 MoneyGeek.com, December 21, 2022
4 Any companies mentioned are for illustrative purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Any investment should be consistent with your objectives, timeframe, and risk tolerance.