The beginning of your child’s college experience can be exciting, challenging and a bit scary – all at the same time. In moving away, your student will be adjusting to a new atmosphere, new friends and a substantial lifestyle change. With all of the changes that will occur, it may be easy to forget about the additional financial responsibility that will be required of your student. With a little extra work and attention to detail, you should be able to help them start off on the right foot financially.
Financial education should not be a trial and error learning process. For a successful “hand-off” to occur, we believe that there are four key learning objectives that you should plan on working through with your child before they head off to college. Educating your child on these issues should help your student begin the formation of good financial habits. We believe that the key financial learning objectives for achieving a successful and independent lifestyle away from home include:
- Budgeting or Cash Flow Management
- Debt Management
- Proper Insurance Coverage
- The Importance of Saving
Budgeting or Cash Flow Management
This can be especially difficult. After transitioning to campus life, your student may be faced with managing greater cash flow in and out of their bank account as they ever have in their lifetime. Build a plan; agree to it with your student. Consider budgeting for items like: entertainment, travel, toiletries, meals outside the dorm plan, fraternity/sorority dues, etc. Once you have built the plan, determine how to allocate funds to your student to pay for their needs. Consider dividing their funding up into monthly amounts and fund the amount, placing them in control thereafter. Funding their account once or twice a month like a paycheck while a student is in college is good training for managing cash flows after they have completed college and enter the working world.
Generally, students are pretty clear on handling fixed cost items like rent or a car note, but you may need to offer special help or guidance in budgeting for variable expenses. We find that the unknowns of the variable expenses create the most budget complexity for students. Some of the variable costs likely include: utilities, food, gasoline, clothing and credit card debt, just to name a few.
Given that most students are pretty tech savvy, only a modest amount of work may be necessary on your part to help with additional budgeting if your child’s bank offers online banking. You can work with your student to help them with the initial bill payment set-up of their service providers including setting up the fixed expense payments to go out on pre-determined dates (preferably just after your funds are transferred in) each month. For variable expenses such as utilities and credit card payments, many are available for online bill payment notification. Having bills come in through your student’s online bill payment system can make it easier for them to track and get organized as they can anticipate when bills will arrive. They can also keep better track of due dates and average amounts due.
You should warn your child about bank service charges, especially for sending or receiving wire transfers and remitting payments with instant delivery. There are generally costs involved when they wait until the last minute to pay a bill. While paying one instant delivery fee may seem insignificant, the fees can add up significantly if the instant delivery method becomes a habit. Remind them to deduct any bank fees from their ledger balance as incurred so that they are mindful of balances available as to not overdraw the bank account.
Yes, students will likely get credit card offers. They may even get several different, unsolicited bank card offers. They will also be faced with the same temptation as you are when making retail and even online purchases. Think about how many times when you check out, you are prompted that you can save 10% today if you open a credit card account. Coach your student on how to reject those offers. This is a great opportunity for them to learn that it may feel flattering to receive offers of credit, but handled incorrectly, it can be financially debilitating.
Using credit cards responsibly can enable your student to establish good habits and proper cash management. With a credit card, a student can learn how to track expenses, establish good credit history and even earn reward points. Using an appropriate amount of credit wisely can assist your child in establishing good credit history for future expenses like renting an apartment, buying a house or a car. You should help them decide on an appropriate level of monthly charges and always instruct them to pay off the card (fully) each month.
Many parents will cover certain types of insurance — car, renters and medical — for their student. However, some students must pay for their insurance once they graduate from high school. Make sure your student understands your policy on this issue. Given the importance of maintaining insurance, if you plan to make this expense your child’s responsibility at graduation or some other event, discuss this with your child at least a year in advance if possible, so that they have time to decide how to pay for the expense.
Getting good grades is always a great policy but good grades can actually save money on car insurance. Check with your insurance agent to understand the rules, and make sure your child knows that you will want to take advantage of this benefit.
Renters insurance may be a good idea if your child lives alone or shares an apartment with another student. Depending upon the setting and circumstances, renters insurance is generally inexpensive and would be quoted based upon your child’s furnishings and possessions. Renters insurance may be unavailable for dormitory or fraternity/sorority living arrangements, so keep that in mind when you pack up possessions to send off with your student.
While changes in the law have made keeping your student on your medical coverage possible; make sure your child knows how to use the coverage. Research which physicians in their new location will take their insurance and what they must do to have the bills covered, such as pre-clearance or pre-certification or referral by a primary care physician to see a specialist if required under your policy.
Importance of Saving
As your son or daughter prepares to graduate from college, make sure they have paid off any student loans and have no credit card debt. As soon as they have found employment, encourage them to sign up for their first 401(k), IRA or Roth IRA. Explain the importance of paying themselves first. By paying themselves first, they can grow savings for their future, making for a smooth transition into “the real world.”
Your child may make financial mistakes, even if they have always been responsible. Here are the basic rules for success:
- Don’t allow them to use credit cards to spend ahead of income – it becomes a vicious cycle.
- Avoid getting cash advances from credit cards, as interest charges will begin immediately and there may even be an extra cash advance fee, even if you pay the balance in full at month’s end.
- Don’t give in to “special offers” – they are never special.
- Never pay an annual fee for a card.
- Don’t let reward points sway your son or daughter to buy something on credit and violate good cash management habits.
At Kanaly, we not only work with our clients but also with their family members. Many times we find that children may be more likely to receive counsel from us regarding financial issues. Please let us know how we can assist you and your family.
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