College is not just about studying and social life. In many ways, it is a set of training wheels for adulthood that helps you learn to navigate being fully responsible for yourself, including your finances. In many families, however, money is a taboo subject. But if a child is going to grow into a successful adult they need to understand how money works. Before your graduate heads off to college, you may want to talk about their financial health. Hopefully, they already have a basic understanding of bills, budgets, and credit (BBC), but the application of those concepts is about to get very real.
This is a complicated issue. If you have a trusted financial advisor, ask them if they would consider giving your child a crash course in credit, savings, and investment. Not only will a professional likely be able to explain it more clearly than you can, but making a connection now will set up a relationship with an advisor for your student in the future. But if setting up such a conversation is not an option for you, here are a few steps and tools to set your student up for financial success.
Bills:
Start with the basics. What are you still willing to help pay for and what do you now expect your child to provide for themselves? This might seem obvious to you, but I had a dorm mate who was shocked when her parents didn’t provide her an allowance once she left for college, and her parents were shocked she still expected it. She found out she would no longer be getting an allowance the day her parents dropped her off for college, and she had no idea how to make money, much less how to budget it.
Don’t take for granted that you, your partner, and your child are all on the same page. Each family’s finances and expectations are different, so there are no wrong answers, but you do need to clearly lay out what you will continue to cover and for how long.
That includes things like:
*Tuition: Tell your child exactly how much money is already set aside, and who is covering any overages.
*Books, housing and meal plan: Do you consider books and housing costs to be part of tuition, or do you expect your child to pay for them? Will you cover meals they don’t eat in the dining hall, or is that pizza they ordered on their dime?
*Clothing and personal care: Your child probably never even considered paying for their jeans and haircuts. Are you willing to pay for all or part of that, or is it time for them to take over?
*Vehicle payments, gas, and maintenance: If they are taking a car to school, who owns it and who is responsible for its upkeep?
*Activities: Are those debate team trips part of the pre-law course work, or do you consider that to be extracurricular?
*Vacations: Will you cover all trips, only family holidays, or do you expect your child to pay their own way if they want to go on the annual family ski trip?
Budget:
Now, your child needs to build a budget for their new responsibilities. Using all of the factors discussed, have them carefully think about where their money will go and how they will track their spending. The NerdWallet website has a great free budget worksheet that has a student option and can help guide the process.
In some instances, it’s a good idea to ask your kid to write down everything they spend money on for a month. It’s often an eye-opener how quickly they spend their cash.
As we all know, the cost of living can differ from place to place, so have your child research the average cost of things where they will be attending school. An online cost of living calculator (NerdWallet also has one of those) can be helpful.
After they have a base number for their cost of living, have them add a reasonable percentage on top for savings. An emergency fund should be part of their budget. Does your child want to give a certain amount each month to a charity, or will they be giving back to their community through other means like service work? If they do plan on donating, that needs to be included in the budget as well.
Now that you agree on who is responsible for what and what bills your kid need to pay regularly, you need to discuss how they make or receive money to cover those costs.
Will you be paying the bills you agreed to cover directly to the school, or will you supply an allowance to cover them? What are the stipulations for that allowance? For example, a certain GPA to access the funds? Will you provide the allowance through a pre-loaded bank card, or will you deposit money into your child’s bank account?
How will your child earn the money needed to cover the expenses they are directly responsible for? Help them brainstorm. Can they apply for work-study, or do they need to get a job off-campus? Have them consider the maximum distance of the job from the school and how flexible the work schedule needs to be before they apply.
Now that they are going to have income, they need to have a place to put it. Help them identify the best bank for them. A family institution where you can link your existing account to theirs for emergencies might be a good idea. If they are attending university in a different country from you then an international bank might be a better option to avoid ATM fees and transfer penalties. But don’t decide for them. Help them research and figure out what questions to ask. Doing it for them won’t help in the long run.
Credit:
Perhaps one of the most important and most fraught aspects of finance is learning to use credit. Explain what credit is and why it’s necessary. There are a few ways your child can build credit now.
*Students loans: If you need to take out loans anyway, have them take out at least some in their own name. As they repay them after graduation, it will show that they are responsible borrowers.
*Credit cards: A low-limit credit card (think USD 200-500) paid off every month is one of the fastest ways to build credit. If your child needs to buy books, have them put that expense on the card and then immediately pay it off. A card is also a good idea in case they have a small emergency, like a flat tire.
However, it is vital that they understand interest and minimum payments. This is a complicated topic, so here are a few resources. There is an excellent article for first-time credit card owners on the Intuit Mint Life blog, called “Credit Card 101: How Do Credit Cards Work,” or if you prefer videos, there is a YouTube channel called Honest Finance that has a series on understanding credit cards. None of this is the most fascinating reading or watching your child will do this summer, but it is important.
*Authorized User: Many institutions will not offer a student a credit card, especially if they don’t have income. In that instance, an option is making them an authorized user on your credit card. This will help them build credit to eventually get their own card, but there are some things to be mindful of.
Authorizing them means they can legally run up your credit card bill. This could harm your credit score, and if you were ever to default the bank could hold your child responsible for the payments as well, since their name is on the account.
This period of transition can be a time for your child to grow in maturity and take control of their financial health while they still have you as a safety net just a phone call away. Learning to navigate their own finances is not the most fun or exciting part of college, but it’s an investment they need to make in themselves for their future.
KEEP READING: Money Matters, From One Teen to Another
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