As a parent, you are faced with one of life’s greatest challenges: preparing your child for financial responsibility. When your child leaves home for college, they will explore their independence in more ways than one. Learning the financial facts of life can be confusing and can take years. You can help prepare your child for financial independence by sharing these important lessons.
1. Create a budget
The first step to financial responsibly is by making sure you do not spend more than you have. You can empower your child by helping him/her establish a budget for college. Consider how much income the student has (including loans, scholarships and financial aid), then add up the items you are budgeting for to see if the student can afford them. Here are some things to consider budgeting for:
- School supplies
- Transportation (cabs/bus)
Managing and sticking to a budget will teach your child to make good financial decisions and will provide them with a sense of control.
2. Keep track
Creating a budget is half the battle – sticking to it can be the hardest part. A good tip to share with your child for sticking to their budget is to keep track of all spending. There are a variety of tools available besides bank accounts that can help with money management. Mint.com and LearnVest are two great tools that allow you to organize your finances, set a budget and alert you when you’re getting off track.
3. Be smart about plastic
If your child does not already have his/her own bank account, this will be the first step. Once they establish their own checking account, they are ready to determine how they will pay their bills. There are a variety of different payment options. The most commonly used payment method for college students are debit cards, since there is debt risk associated with credit cards. Take the time to explain the advantages and disadvantages to using both:
|When is money taken from account?
||Immediately- automatic deduction from account
||At a later date- Money is borrowed with a line of credit.
|Can you accrue debt?
||No- but you can overdraft
|Can you establish credit history?
||Yes- build a credit score as you pay bills
|Are there rewards?
||Yes- earn points/rewards when you make purchases. Used to get cash back, discounts, miles, etc.
|Are there risks?
||Minimal- easier to keep track of funds since money is automatically deducted for each purchase.
||Higher- more difficult to keep track of spending because you pay back what you borrow at a later date. Easier to accrue debt.
3. Pay bills on time
It is important to explain to your child that not paying bills on time can have a negative impact on their financial future. Explaining the importance of establishing a good credit history early in life is an invaluable lesson. Your child will need to have good credit history in order to qualify for a private student loan if they need more funds for college, buy a new car, apply for a job or take out a mortgage for a house later in life. It is important to explain to your child that in order to establish good credit, they must pay their bills on time and in full. Even a late phone bill can negatively affect their credit score.
5. Borrow what you need
If your child has taken out a loan for college, it is important to stress that they will need to pay back that money, along with the interest accrued, once they graduate. With that said, it is key to emphasize that they should only borrow what they need or they will quickly find themselves under mountains of student-loan-debt situation after graduation. If your child finds him/herself in a situation where they need more money for school, there are other ways to fund their education than borrowing such as finding a job and applying for scholarships. If they do borrow, make sure to exhaust all federal loan options first, especially subsidized Stafford loans, which do not accrue interest while a student is in school.