You have been preparing for this day for years. You modeled, mentored, instructed and educated your child to prepare them for the next phase of their life. One of the most important conversations to have with your college freshman is how to manage money. Parents and students must establish a mutual understanding about money.
- Set the framework. Whatever income sources they have (part-time work, monthly allowance, student loans, etc.), students need to understand how much they have to spend and what expenses are their responsibility. Are they responsible for buying their toiletries, gas and groceries? Do they pay their streaming service bills? What about dining out, clothing and salon services? Communicating the “rules of the game” eliminates the potential of conflicting assumptions and sets them up for money management success.
- Create a spending plan. Help your student determine how much they should be spending on needs and wants. Creating a plan allows the student to allocate dollar amounts to each expense category and encourages them to keep track of their spending. Show them how to manage their bank account and track expenses in a spreadsheet or with free apps like EveryDollar or Goodbudget. Like any skill, learning how to manage money takes practice. College is a prime time to master this skill.
- Discuss the dangers of credit card debt. A credit card can help students build credit, but they need to understand how to utilize it properly. A credit card is not an extra source of income to buy things they can’t afford. Discuss the importance of paying off the balance each month and making payments on time. Late or missed payments will stay on their credit report for seven years, long after they graduate from college. To build credit, encourage your student to use a credit card only for small, non-emotional purchases like gas or groceries, and pay off their balance in full each month.
- Educate them about student loans. Students need to understand loan basics, such as how compound interest works, the difference between fixed and variable interest rates, and estimated student loan repayments. They need to be aware that the more they borrow, the higher their payment will be for several years after they graduate. Once a student understands how four years of student loans can add up, they can comprehend the importance of minimizing student loan debt and sticking to the spending plan.
Conversations about money can be difficult for some families, but an upfront planning conversation can help prevent a much more stressful conversation down the road after a financial mistake or misconception has occurred.