It’s August, and millions of college students are heading off to campus. For many, it’s their first time juggling finances on their own. Some are equipped to handle their money, others … not so much.
Even if you’ve never talked dollars and cents with your college-age kids, it’s not too late for “a crash course in personal finance,” said Gail Cunningham, spokesperson for the National Foundation for Credit Counseling in Washington, D.C.
“It may be too little too late, but at least you’ve tried. You absolutely have to do this before they leave home, because it could lead to a financial disaster,” she said.
Studies repeatedly show that U.S. teens and young adults have a wobbly understanding of personal finances. Even so, walking through a few basics before they leave home can help ease the financial transition to campus.
Have the talk
To avoid family friction and unpleasant surprises, financial experts encourage families to sit down and hash out who will pay for what. For instance, Mom and Dad might cover tuition, books, fees and room/board, but expect their student to cover extras like clothes and weekend entertainment, either from long-term savings or summer earnings.
And put it in writing, says Cunningham. “It needs to be down on paper, signed and dated,” like a contract.
“Work out a reasonable spending plan together. ‘Suzie and I agree that X dollars per month should be sufficient for her spending,’ ” suggests Cunningham. Spell out what you’ll pay for and what you won’t. Also discuss what happens when your kid bounces a check or racks up overdraft fees. Will you pay or expect them to cover the charges? Those conversations are better handled ahead of time, rather than in an emergency situation, she noted.
Having something in writing helps “avoid arguments and it preserves the relationship” with your child, Cunningham said. It’s especially useful if you’ve co-signed or added your child to your credit card, say for booking tickets to travel home on holidays and vacations. That plastic could be akin to being “a kid in the credit candy store,” she said. “You’re opening yourself up to ‘You never told me I wasn’t supposed to go to South Padre Island over spring break!’”
College is a good time to start financial habits that can last a lifetime. Keeping track of your monthly spending is the first step, say financial experts.
It can be as simple as a manilla folder where you stuff every ATM and store receipt. At the end of the month, pull them out and compare them with your monthly checking account or credit card statement. If there’s a billing error or charge that’s not yours, you can dispute it immediately. Saving receipts also helps if you need to return a bookstore or store purchase.
There are plenty of tech tools that make budgeting and tracking spending a snap, including banking apps on smartphones and websites like Mint.com. Ask your bank or credit card company to set up alerts by text or email when your account balance is running low.
“A lot of kids have to use their own summer earnings (for spending cash). They have to learn how to make that money last. They can’t blow it all on beer and pizza the first month of school,” said Janet Bodnar, editor of Kiplinger’s personal finance magazine.
Small things can make a big difference. “Saving receipts, even just tossing them in a basket on your desk, or making Post-It notes on your computer,” she said. “If you went out for pizza or bought stuff at the bookstore and don’t check your bank balance, you lose track of the day-to-day spending.”
One of Kiplinger’s summer interns this year told Bodnar the best lesson he learned in high school economics was how to do a monthly budget, which he now tracks on an Excel spreadsheet. As a practical, day-to-day tool, “he said it was far better than any supply-and-demand chart” he ever did, she said.
But it doesn’t have to be done using a slick spreadsheet. Paper and pencil work just fine.
“It doesn’t matter how you track it; what matters is that you do it,” said Cunningham.
Credit cards or not?
Under federal regulations imposed in 2010, students younger than 21 can no longer open a credit card without an adult co-signer (i.e., Mom or Dad) unless they can prove they have the financial ability (i.e., a job) to pay their monthly bills.
Not every financial expert believes college students should have a credit card.
Those like Kiplinger’s Bodnar say it’s a huge mistake, at least until a student has shown she’s fiscally responsible. “For many kids, especially those who haven’t had financial training, getting a credit card is like a bomb waiting to go off,” she said.
She said it’s too tempting and too easy to charge up beer-and-pizza parties, new clothes, concert tickets and other weekend expenses. Her own three children, she said, didn’t have a credit card until they turned 21.
“You want to know how your kid is going to manage money on their own. Some sort of cash basis – a debit card or a pre-paid card that parents can load up – is better, so you see how your kids are going to manage it.”
Conversely, Cunningham said a credit card can jump-start a student into building a good credit history. One way is to be added to a parent’s card as an “authorized user,” which lets the student piggyback on the parent’s good credit history. The downside is that if a student racks up too many charges, it’s the cardholder (parent) who is responsible for paying it off. (Unless you’ve got other terms in that written contract.)
“The young adult is going to be able to build a credit history. It’s up to them whether it’s going to be a positive or negative one,” she said. Those who finish college with a decent credit history will “have a leg up on their peers and be able to rent an apartment, buy a newer car, etc.”
Ultimately, it’s not about making perfect grades in Personal Finance 101. We all make financial blunders, and college students away from home undoubtedly will do so, too. Consider them teachable moments.