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While college is a time for children to learn the ropes of the real world and experience independence for the first time, it can also be a struggle for those who have never been financially on their own and have a lot of learning to do.
According to a 2011 study conducted by Higher One, Inc., scores on a quiz to measure current college students’ basic financial management knowledge went down from last year, with more than 70% of students receiving a failing score. Less than 30% of the students answered six or more questions out of nine correctly, with more scores in the bottom percent than the previous year.
Although it’s natural for parents to want to help their children financially succeed, giving them the right tools to handle their own finances down the line will help them far more than solving their financial woes for them.
“A lot of the habits you develop in college as a part of minimizing your debt and saving money and learning how to budget is probably the way you’re going to handle your finances for the rest of your life,” says Casey Meade, certified financial planner at Howard Bailey Financial. “The earlier on you learn that, the better off you’ll be in the long run.”
Here are six tips that parents can use to help their student start saving while in school.
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Have an initial conversation about saving milestones
While most college students don’t have a final roadmap of where they want to end up in life, it’s a good idea for parents to talk to their children about how much money life in and out of college requires.
“Sit down with your college student and ask them about their short-term, mid-term and long-term life goals, whether it’s next year’s vacation, buying a new car, getting married or pursuing advanced education,” says Shelley Solheim, director of financial education at Capital One.
Start with the basics: create a budget
Students can’t establish attainable saving ambitions until they have a clear understanding about what kind of budget they’re working with and what financial obligations they need to meet.
“Create a list of expenses your student expects to incur and plan to put money into a savings account for unexpected expenses as well as for major life goals,” suggests Solheim. “Establishing a realistic budget will empower your student to be in better control of their finances.”
Monitor their spending
For some students, living in a new environment with more freedom brings the temptation to overspend. Parents financially supporting their college students should establish a joint account online that they can keep an eye on spending.
“Parents can actually see what the student is spending money on and then they can contact them if things are going awry--it gives them the ability to monitor an account in a way that I don’t think you ever could before,” says Dan Krewson, financial advisor and vice president of Valley Green Bank.
Solheim also suggests parents help their student establish a method for tracking expenses, either through an online program or even writing it down to serve as a reminder to stay within their limits.
Put saving on auto-pilot
Set up an automatic withdrawal and deposit from a checking account to a savings account each month to force children to save and learn how easy it can be.
If a student has the ability to handle a part-time job while in school or can afford to apply a percentage of their budget to their savings each month, he or she will see that over time, even putting away a little bit at a time can add up.
“If they’re not used to spending the money, they’re not going to miss it,” says Krewson.
Parents can also help their kids understand they can put their savings to work with the help of compound interest.
“It’s never too late to show a young person what compound interest can do for them-- if you’re 20 years old and you start saving $2,000 dollars every year, by the time you reach retirement age, you could have maybe $250,000 [with] minimal interest,” says Weade. “Just seeing those numbers can be a realization for a young adult.”
Give them incentive to save
Although stressing the importance of having a financial cushion is reason enough to make saving a priority, parents can also create more incentive to put money away by helping their kids reach a goal, says Krewson.
“Figure out how much that’s going to cost and how much you have to set aside each month to achieve that goal,” he says. “The parents can encourage them by doing a dollar for dollar match—for every dollar you save, I’ll contribute to that savings fund.”
For students looking to make a big-ticket purchase like a car, Krewson suggests parents use the match technique to help them on the front end instead of potentially hurting their own credit if they are irresponsible with payments.
“That way you’re teaching them about saving and you’re also teaching them that there’s not always a safety net if they don’t pay the bill,” he says.
Keep open communication about money
The experts maintain that it is essential to touch base with children from time to time while they’re at school about their financial situation and ask the right questions.
“How’s your money coming? How’s your budgeting? How’s your savings?” says Devin Miller, CEO of Balance Financial. “Just having an ongoing collaborative conversation about it, saying we’re in this together, I’m here to help, and let’s take a look at how you’re doing.”
Solheim points out that it may be helpful for parents to admit to their own money mistakes so that kids understand that they were also inexperienced and new to finance issues at one time. Children will appreciate the honesty and feel comfortable being open about asking for help or advice.