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In preparing your child for college, you’ve taught them everything you know about life. But, if they can’t manage their finances while in college, your troubles are just beginning.
Sending a child off to college has to be one of the most momentous occasions a parent can experience. However, getting a monthly call from your college student asking for more money can get old really fast. We hope that we’ve instilled our children with good values and common sense by the time they leave for college, but that doesn’t always translate to sound money habits which are often formed over years of trial and error. Although managing finances through college life is not rocket science, it can present a challenge for young students who have never had to balance a checkbook. Parents can shorten the learning curve and equip their students to better navigate college life by teaching them some fundamental principles of personal finances.
Create a Spending Plan
It’s difficult to imagine any parent sending their child off to college without a budget. Money is always tight when it comes to paying for college, so there is little margin for error. Your goal as a parent is to stave off the monthly call and instill in your student the virtues of living under his or her means. It’s a tall order, but it‘s achievable when all parties can adhere to a strict spending plan. College expenses are fairly straightforward. Tuition and rent are locked in. So, the variables are food, personal needs, transportation and fun.
Food: If food expenses are covered under a boarding arrangement, such as dorm dining, you still have to account for any off-board dining, such as fast food meals and late-night munchies. Regardless, you will need to establish a fixed food budget that allows your student to eat more than Top Ramen every day. The food budget should be broken down into a weekly, if not daily, allowance. If he is budgeted for $10 per day and spends $15, he will need to get creative to spend only $10 the next day. Perhaps the budget should allow for one or two fast food purchases a week when the schedule gets too busy for cooking dinner or preparing a lunch.
Personal needs: Should absolutely be fixed. You can be sure that students know how to stretch their personal hygiene supplies, so they should never run low.
Transportation: If your student has a car for transportation, you will need to budget for fuel and maintenance. Hopefully he is driving a well-maintained car that won’t be in need of constant repair. If no car, then public transportation costs need to be included. This should be a fixed expense with very little wiggle room.
Fun: This is the big X-factor for college students. Many parents don’t budget for this; either because they assume their students are at school to work, and they should find free fun; or they put the burden of funding fun on the student through earnings from a summer job. It’s important to note, however, that any budget shortfalls are likely to occur as a result of overindulgence in fun. Parents and their students should agree on how much money should be spent on fun, regardless of who pays for it.
Many students have experience managing a checkbook before they leave for college. Of course, today a checkbook is really an online account that doesn’t require all the balancing and reconciling of the old days. Online accounts make it much easier for students to watch their cash flow and keeps things balanced; however, cash flow still needs to be managed to ensure there’s enough on hand to cover every expense.
The challenge for students is that there are sometimes multiple sources of income that need to be directed to multiple categories of expenses. For instance, they might receive a portion from their parents that are to be used for room and board. They also might receive a portion from financial aid or student loans that should be directed at tuition and books. They also might have their own source of income that they use for fun and extras.
To prevent comingling funds, which could lead to confusion and the inadvertent misdirection of funds, you should consider having your student use the bucket approach to cash flow management. For a college student, this might consist of managing funds from three separate accounts - one for tuition, books and school fees; one for room and board; and one for personal expenses. Each account has a fixed budget or spending target that can be easily tracked through separate online accounts. If one of the accounts has a surplus over the spending target, the funds can be transferred to another account to cover expenses or transferred to a savings account.
Managing Credit Cards
Parents should be aware that, at some point, their students will be approached by a credit card issuer with an offer for a student credit card. They’re usually seen on campus during school events handing out applications. Parents who have experienced this will tell you that students and credit generally don’t mix. Although it’s probably a good idea for a college student to have a credit card that can be used in emergencies, you may want to consider setting up an authorized user account under your credit card account. That way you can keep track of the account and establish strict rules for its use. Some credit card issuers will report payments made on the account to the credit bureau, so your student can start building a credit history.
Preparing your children for launch is an 18-year endeavor which ultimately comes down to equipping them with the right tools and values to begin managing their own affairs. Teaching your college-bound student how to effectively manage his or her personal finances may be one of the last important life lessons they learn from you. And, whether they tell you or not, your student is concerned about his or her ability to get it right. It’s probably one of the most teachable moments you’ll ever have as a parent, so be sure to take full advantage of the opportunity.