Getting your child to high school graduation is something to celebrate, but it can also be downright frightening for both parents and students. All of a sudden, kids as young as 18 are about to be thrust into adulthood and living on their own. Not only are they cooking and cleaning and doing their laundry for the first time in some cases, but they are suddenly forced to manage their finances.
4 Important Financial Lessons for College Students
Of course, the move out of the family home and into the adult world doesn’t have to be so sudden. Parents can take steps to teach their college-bound kids about financial literacy all along, which can help set them up for success.
But parents don’t always know which lessons are the most important, or which areas their young adults need help with. As your kids prepare to head off to college, here are the main areas of personal finance all families need to cover.
1. Personal Finance Basics
As your kid heads off to college, they must start to learn very basic personal finance skills. For example, they need to get their own beginner checking account so they can learn how to balance a checkbook, write a check, and stay on top of their bills.
A student credit card can also be helpful. With this type of credit card, young adults can get access to a low line of credit that can help them learn positive credit habits, including how to use credit for convenience without racking up debt. Meanwhile, a credit card can help your young adult build a credit score that they’ll need later in life when they want to buy a home or finance a car.
As you help your child learn personal finance basics, make sure they understand the importance of paying all their bills early or on time. Also, make sure they know that the moves they make today can and will make a difference in their future.
If they rack up a huge credit card balance and refuse to pay it off, for example, they could ruin their credit for years to come and jeopardize their chance to take out a mortgage for their first home or qualify for a business loan.
2. How to Make a Monthly Budget
Almost everyone could benefit from using a regular budget each month, and that’s true even if your budget is nothing more than a spending plan created with pen and paper. All anyone needs to do is write down their entire income for the month, with their entire list of expenses listed in another column. Generally speaking, budgeting works best at first when people have taken the time to go through their bank statements and credit card bills first so they have a good idea of where their money goes each month.
Seeing your income and bills written down in black and white can make it very apparent if you need to cut spending in some areas, such as food or entertainment. A monthly budget can help your young person figure out how much they spend and how much of their income needs to go toward bills. A monthly budget can also help them figure out how much they can pay toward their student loan debt (if they’re accruing any) while they’re still in school.
Check out our resource “The College Student’s Guide to Budgeting” for our favorite budgeting tips and tricks.
3. The Power of Interest
Here’s another factor your kids need to understand. Compound interest is powerful and almost magic, and it can work in your favor in a big way. However, the interest charged by credit cards and loans is money on top of the money they already borrowed that they will need to pay back.
When it comes to using compound interest to grow wealth, I always recommend people show their kids how to use the investment growth calculator at investor.gov. With this calculator, you can show your kids some amazing stats. For example, someone who saves $100 per month from age 25 to 60 and earns a 6% rate of return will approach retirement with over $133,000 even though their contributions during that time only work out to $42,000 over 35 years. If they bump their savings up to $300 per month, they would approach age 60 with over $401,000 despite contributing only $126,000 during that timeline.
But interest cuts both ways. Someone paying an 18% APR on $10,000 in credit card debt with a $300 monthly payment would need 47 months to pay their credit card off. In the meantime, they would pay an extra $3,967 in interest payments.
The lesson here? Make sure your kids are using interest in their favor instead of burdening themselves with it.
4. Be Proactive About Your Finances
It’s way too easy to just sit back and let life and your finances run their course, but there are a lot of benefits to be gained if they are proactive about making sure their money works for them. Unfortunately, too many students start the process without enough information. For example, a recent national College Ave Student Loans survey of college students showed that, of those students who borrowed loans, 77 percent of students don’t know what their payment will be once they graduate. Only 63 percent considered their future salary when determining how much to borrow for school in the first place.
With these stats in mind, the first step you can take to be proactive is educating yourself and asking questions. After all, you’ll be in the best position to make good choices if you have as much information as possible.
Other examples of being proactive can include:
- Using a budget to make sure bills are paid and debt is avoided
- Paying down student loans while in school. Even $25 a month can save you money over the life of the loan
- Refinancing student loans to secure a lower interest rate or monthly payment you can afford
- Working part-time during school to build a safety cushion or make payments toward tuition or student loans
- Investing or saving money regularly to build wealth
- Automating your finances so the grunt work is done for you
- Sitting down to create short-term and long-term financial goals
The bottom line: Parents should teach their kids that they have some control when it comes to their finances, even if their realm of control is limited while they’re still in college. At the very least, they should be using this time in their life to build positive financial habits and learn how to avoid debt.
The Bottom Line
Parents with kids approaching college have a lot to celebrate, but the hard work isn’t done quite yet. Parents must spend some time educating their young adults about the decisions they’ll face in the very near future, and how the decisions they make (and don’t make) could affect their lives for years to come.
At the end of the day, it’s up to us to teach our kids what we want them to know about the world, including personal finance. If we don’t, they may wind up learning all their lessons the hard way.