Before your son or daughter heads off to college this fall, take time to discuss the important things in life, like education, relationships and money management.
Far too many freshmen, as well as older students, haven’t had the experience of managing their own money. But that is one of the skills they will need as an adult, and going off to college can be one of the big steps toward financial independence.
▪ Let’s start with the basics, beginning with awareness. A college student should know how much money is in his/her bank account, and be able to check the balance quickly and easily.
Nearly all banks offer mobile apps that provide access to personal accounts, making it easy to check balances, make purchases, pay bills or transfer funds. Your college student will use a smartphone many times a day, so there’s no excuse for not knowing how much money is left in the account.
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That’s important because it can help prevent overspending, a serious financial problem for many college students, as well as adults. Tell your child, “Don’t spend more money than you have in your account.” That rule can keep a college student out of debt and avoid costly overcharge fees.
▪ Next, help your child understand the difference between financial needs and wants. For a college student, many of the basic needs will be paid for by parents, a scholarship or financial aid. That includes housing and food, as well as educational expenses like tuition, fees and textbooks.
Other necessities for students living in a dorm include a smartphone, along with a tablet or laptop. Most other purchases, like the latest clothing styles, fall into the “want” category.
You should tell your child to pay for the necessities first, and then see how much money is left for the optional purchases. Instilling this habit in a college student can make a big difference when your son or daughter joins the workforce and has to dedicate a big portion of that paycheck for rent, utilities and transportation costs.
▪ Budgeting is another topic to discuss with your college student. If you plan to deposit a certain amount into your child’s bank account every month, explain both the amount and the reasons for your thinking. If your child thinks the money is not enough, you can point to the other costs you’ll be paying for college.
Scholarship funds or financial aid can also be included on the income side of the budget. If so, be sure your child knows how to apply those funds to the expenses listed in the budget.
Make sure your child practices preparing a monthly budget, including both the planned income and expenses, and the actual numbers at the end of each month. If there is an imbalance, it’s much better to find out right away than to put things off till the end of the semester.
▪ It’s not possible to budget effectively without keeping track of expenses. Again, encourage your child to use a smartphone app, a computer budgeting program or traditional pencil and paper. That will provide accurate information on where the money is spent, so your son or daughter can make better spending decisions in the future.
▪ You should also discuss the positive and negative aspects of credit cards . Opening a credit card account with a relatively low limit can help your child learn how to use “plastic.” A credit card also can be a source of security for both children and parents, providing a source of funds in case of an unexpected financial emergency.
However, credit cards also make it easy for your child to overspend the budget each month, and fall into debt. Hopefully, your child can pay off the entire credit card balance each month, without seeing the amount due keep growing as a result of unnecessary spending and high interest rates.
▪ Finally, be sure your child is aware of the importance of security. Don’t give bank account passwords to roommates or friends, and be careful when accessing online accounts in a crowded public area to reduce the risk of hacking.
Your child should monitor his/her account activity closely, and let you know if there are any unauthorized transactions or other signs of fraud. Unfortunately, college students are often targeted by criminals who take advantage of their financial inexperience.
So, sit down with your college student and talk about money management before classes begin. It’s a great investment of your time and can pay big dividends for your child.
Andrew Menachem is a wealth adviser at The Menachem Group at Morgan Stanley in Aventura. Views expressed are those of the author, not necessarily Morgan Stanley, and are not a solicitation to buy or sell any security. Follow Menachem on Twitter @AMenachemMS.