In the months and weeks leading up to your child's first move-in day at college, it's normal to go through a mental checklist assessing the hallmarks of sound parenting.
But if there's one topic that touches on every aspect of your child's impending college life, it's this: money management.
Money management determines which books your child buys for her classes or if she can afford certain extracurricular activities. It encompasses meal plans and morning coffees as well as weekend activities and travel decisions during semester breaks. And more seriously, good money management can help your child decipher the fine print that comes with her student loans and that first credit card.
In 2018, 20 million students started college hoping to get an education that will make them competitive in the job market. But they're also facing the stress of student loan debt and credit card debt — which stands at $1.5 trillion and $870 billion for American adults, respectively.
That's why it's so important for your incoming freshman to have a solid foundation of money management skills before being left to his own devices.
"In college, kids must make their own decisions regarding their money," said Paul DeLauro, manager of Wealth Planning at City National Bank. "Their gas money, car maintenance, dining out, entertainment and the like should come solely out of their limited budget. Remember, their time should be spent studying, not spending."
On average, young adults' structured financial education begins at age 27, according to RBC's Wealth Transfer report. But starting that training earlier leads to higher confidence, according to the report: 66 percent of those who began learning about finances before 18 rated themselves as confident in managing money.
College is a transitional period that presents an ideal time to teach your child how to manage money — from paying bills to budgeting and understanding loans.
Budgeting is one of the most important skills to master. DeLauro said that ideally, budgeting conversations and practices should have become habits in high school or even earlier.
"The hope is that by the time a child goes to college, these skills would already have been learned. But nevertheless, if you're teaching your college-bound child these practices now, remember to demonstrate how all fixed expenses have to be paid with a certain amount of dollars," he said.
Going to college will add several new fixed and one-time expenses to the student's budget, such as books, rent, fees for extracurricular activities, personal spending, transportation to come home on breaks and the like. Sit down with your child and detail out what expenses will arise each semester.
You'll also need to discuss where the money originates to pay those expenses. Will you provide your child with the same allowance they've been receiving? Do you have a 529 plan that could cover some or all of these expenses? Will you provide your student with a discretionary budget, or do you expect him to get a part-time job to cover personal spending?
Even if you'll be covering all of the costs of their mandatory expenses, from tuition to gas money, they need to be aware of that, understand how much it is and how you saved for it. You should also put them in charge of actually paying those expenses so they see how money comes into and goes out of their accounts.
"The core lesson should be that the money in a checking account is not there just to spend freely. Much of the funds in that account will already be designated for mandatory expenses, while the rest will be discretionary — and that has to be made to last," said DeLauro.
Most parents don't think about retirement savings as something for a college student to consider. But by instilling in your child the idea that saving for retirement is mandatory, and they start doing so with their limited funds in college, you'll prepare them to hold onto that principle when they graduate and become employed
"If a child receives an allowance in college, or if they earn an income, they should be taught to save at least 10 percent of those funds in an account that they will not touch until retirement," DeLauro said. "Put in their mind that the time they have to work with until they reach retirement is a very strong advantage for them right now."
He noted that saving for retirement is likely a completely new concept to them — and one that will raise myriad questions.
"Be prepared to help your children set up this account and teach them what options they have," he said.
You may be considering opening a credit card in your child's name, either as a way to build their credit or because your child is asking for one. DeLauro takes a strict position on this issue.
"Teach them that gratuitous debt is the death of wealth, and once in college they should never take on consumer debt without consulting with you," he advised.
"If you decide they can have a credit card, then you should ensure that it's one with a very small limit. If they need more money they should call you, not the phone number on the back of the card," he said. Most importantly, teach them to treat a credit card like a debit card — and avoid spending more than they can pay off in full each month.Make sure you get their login information and monitor their spending and payments. "The goal should be to live well with no credit," he said.
You'll also need to go over other credit card basics, such as credit scores and how they are impacted by late payments, what happens if the balance is not paid in full every month, and how rewards points work.
If your student gets a job or internship during college, you can begin having conversations about income and taxes.
"Make them aware that their current wages and potential gross salary figures are not indicative of what they'll have to live off of, due to taxes," DeLauro noted.
"This lesson should go hand-in-hand with a wider discussion about Social Security and Medicare withholding, as well as local and state withholding. They need to understand that their salaries will be the net amount they earn, not the gross amount."
Although conversations about money need to start at home, RBC's Wealth Transfer report found that the most effective wealth management education stemmed from financial literacy programs offered by professional advisors.
Inviting your child to a meeting with your banker or financial advisor earlier rather than later is a great idea. They'll see that there are people available to answer their questions, whenever they may have them, and also be exposed to more structured learning programs that may be offered by the company.
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