College Money Skills

USA-PEPPERSPRAY/CALIFORNIA

Your child will have a lot on their mind as they’re getting ready to live on a college campus. Between choosing classes and decorating dorm rooms, your child will also have to manage their own spending money.

“College is the first point in a child’s life in which they’ll be making their own financial decisions,” says Elizabeth Digani, financial advisor at UBS. “If they are not provided with a basic understanding of finances before they go to college, it’s very easy for them to get in over their heads.”

Experts suggest teaching your child how to budget with the goal that when they’re earning their own money, they’ll understand how to live within a certain monthly income.

“When parents don’t help their kids manage their money in college, they’re behind the eight ball when they graduate,” says chartered financial analyst Robert Stammers, director of Investor Education for the CFA Institute. “The school of hard knocks is a very expensive teacher.”

To help your child prepare for their next stage in life, experts provide tips for setting them up for financial success in college and beyond.

Create a Budget

Create a budget with your child so they understand how to strategically plan to meet financial goals, adds Digani.

Incorporate all income and expenses besides tuition, room and board. To start, include among the different line items any rent if your child is living off campus; snacks and meals not covered by a meal plan; entertainment; travel for any trips home or abroad; dues for any clubs, fraternities or sororities; books; mobile phone charges; clothing and if they have a car, money for gas, parking and insurance.

Experts recommend setting a monthly budget so that your child can check their spending weekly. Your child needs to know if they’re on track or overspending, and websites and mobile apps can help make this process easy.

Discuss who will pay for what. Your child may need to work five to 10 hours a week during the semester or summers to cover their expenses, says Michelle Young, an Ameriprise financial advisor. “You begin to realize how much things cost when they work for it and pay for it.”

Open Accounts

“Set up a local bank account with a debit card where they can easily access money,” says Digani. Depending on the state and whether your child is under the age of 18, you may have to be on the account with your child. Once your child is of age, they can apply for and open their own account.

Avoid ATM fees by using a local bank or one that reimburses for ATM fees, and look for accounts that waive monthly maintenance fees, experts advise. Also, link your child’s account to yours so you can transfer money monthly or as needed.

Set very clear guidelines for how money in the checking account is spent, adds Kelley Long, certified public accountant in Chicago. Explain that this money is for your child and their needs, not their friends; that losing a debit card is the same as losing all the money in their account; never to share account PINS or passwords; and to check the account balance daily for errors and to be aware of how much they’re spending.

Decide on Cash Versus Credit

If your child has the discipline, credit cards can help build credit and work to their advantage, otherwise they become an excuse to consume more. Cash can help your child control their spending since when it’s gone, it’s gone. “That’s where a lot of the real learning will happen— making sure you’re not spending what you haven’t budgeted by using that credit card,” says Joseph Montanaro, certified financial planner at USAA.

Parents should explain how credit works and the difference between credit and debit cards, as well as the ramifications of not paying off a credit card, says Digani.

When they first apply, unless your child is 18 years or older and has their own income, you’ll have to cosign their credit card or add them as an authorized user on yours. Experts advise setting clear ground rules for what the credit card can be used for. Also, keep spending limits low at a few hundred dollars to prevent owing what you can’t afford if they overspend.

“Ideally you want your child to have the credit card in their own name by the time they’re out of school,” says Stammers. “You’re trying to teach your child responsibility, and you have to make sure they’re using the credit card properly.”

Have Regular Check-Ins

In the beginning, experts suggest funding your child’s account monthly with what you can afford. “Parents should have regular check-in’s with their child, depending on the child it could be weekly or monthly,” says Digani. “It all comes down to the individual child and how much training they’ve had and how fiscally responsible they are.”

During these conversations, ask whether your child is meeting their budget or running out of money. If they’re short, talk about how they’re spending their money.

“It’s a partnership — if you’re giving your child money every month to spend as an allowance, you should feel free to check their bank accounts in the beginning,” says Stammers. “There should be some transparency, and if your child doesn’t want you to look, that could be an issue.”

Expect road bumps as your child learns to manage their finances. “There will be months that they run out of money and that’s to be expected,” says Stammers. “You want to get them used to the idea of managing to a certain amount of money each month so they don’t come back to you and ask for more. You eventually want your kids to tell you how much they need and then make them live by it.”