The “other” conversation: a parent’s guide to money management for college students
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No parent wants their college freshman losing sleep over money. That’s your job, right? But sheltering them can handicap them when it comes to financial literacy. Unfortunately, the vast majority of parents aren’t talking about money management prior to sending their kids off to college.
A 2017 survey found that 43% of students do not track their monthly spending at all, and nearly half of students couldn’t name one major difference between a credit and debit card.1
Talking about finances with your kids is difficult. For most of us, it’s right up there with talking about the birds and the bees. It’s not the topic of choice in the flood of emotions and errands leading up to school orientation. And what if the financial advice you’re giving isn’t all that sound? Let’s face it, most of us aren’t experts when it comes to managing money.
Luckily, we found a financial expert to talk to. We sat down with Misty Lynch, CFP® to get some guidance on how parents can have the money conversation.
When and how should you break the ice?
It’s best to start teaching good financial habits early — even if your kid is nowhere close to entering college. But don’t worry — if your kid is college bound, it’s not too late.
“Start by being open about your finances, and how you manage your own money. It may not be easy, but it’ll help them understand finances and budgeting, as well as build trust between you.”
– Misty Lynch
What are the most important financial concepts kids should know?
Talk to them about the advantages and disadvantages of compound interest. Because in the words of Albert Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
If your child is going to receive a student loan, give them a head start on understanding the differences between subsidized and unsubsidized loans, so they can wisely manage their loans down the road. If they receive a subsidized loan, their interest will be paid while they’re in school. However, if it’s unsubsidized, the interest compounds, so let them know it’s important for them to pay the minimum balance monthly, once they’re able to start paying it off.2
What are some helpful college-budgeting tips?
Tuition and room and board are just the beginning. Your child is likely to be surprised by how much everything else costs. Tell them not to freak out. Sit down with them and work together to factor earnings and expenses into a reasonable budget.
While it’s necessary to reinforce the importance of spending wisely, it’s also important to remember your child isn’t just there to study. When it comes to having fun on the side, one of the simplest and most effective budgeting tools is sticking with cash. It can keep a night out from turning into a nightmare when they see their credit card statement the next morning.
There are a number of apps that can help with budgeting and tracking what your student spends.
Should they own a credit card?
The better your child understands credit cards, the more likely credit cards will be a blessing, rather than a curse. Some parents decide against letting their kids get a credit card out of fear that they’ll dig themselves into a deep financial hole. However, a secured credit card can enable your child to build credit while living within their means. It’s similar to a debit card; once your child makes a deposit, it becomes the credit line for that account. So, if they put $200 in the account, they can only charge up to $200. It keeps that financial hole nice and shallow.
How can you help your child prepare for the unexpected?
You can’t. But you can build a safety net.
“Opening a joint checking and savings account that you can access is a good idea. That way you always have a way to keep tabs, and be there when they’re in a bind — even if they’re far away.”
– Misty Lynch
In the end, the best thing you can do for your child is simply to be honest and willing to listen. You’re both on a new adventure, and you won’t have all the answers. But figuring out how to help your child budget money in college by working together can make your relationship stronger, and make striking out on their own a lot less scary for the both of you.
This material is intended to promote awareness and is for educational purposes, only.
Citations:
1 Lendedu: “2016 College Students and Personal Finance Study” by Dave Rathmanner, May 26, 2016 https://lendedu.com/blog/college-students-and-personal-finance-study
2 Student Debt Relief: “Student Loans & Capitalized Interest: What You Should Know” by Jennifer Wadia, September 25, 2018 https://www.studentdebtrelief.us/student-loans/what-is-capitalized-interest/
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