All over the country, college students are heading off to campus, living away from their parents for the first time.
Most parents are still supporting their collegiate offspring, but these young people are embarking on their first immersion into managing their own finances.
That presents a challenge for both students and their parents, who should sit their children down for a frank money talk before classes begin.
What will the parent pay for and what will the student pay for? How often will parents provide money and how much will they provide? What happens if the money runs out?
"I think the most important thing to know is what they will be living on, in as small pieces as you can," says Jean Chatzky, financial editor of the "Today" show, who will have two children in college this year. "They really need to understand what they can pull out of the ATM and how many times they can swipe their debit cards."
Ideally, your children will have some experience managing money and will already be familiar with living on an allowance, managing a checking account and using a debit card. If you've taught them well, they may also understand comparison shopping and the value of saving for a rainy day.
"I really worry about kids going off to college without ever managing money," says Liz Weston, personal finance columnist and author. "If they're going to school next week, it's a little late," Weston says.
She advises allowances starting in elementary school, so kids learn to budget, and checking accounts and debit cards starting in high school. Chatzky opened checking accounts for her kids when they were in middle school and deposited their allowances directly into the accounts.
One difficult decision parents have to make is when they will bail their children out, if the child runs out of money before the month or the semester has ended. Weston advises setting the bar high. If your child runs out of money for pizza, suggest that she eats the dining hall meals you've paid for instead. If your child wrecks her car, let her take the bus if she can't afford to fix it.
"They have a limit. They will come up against that limit," Weston says. "One month of hard knocks is often required."
Suggest your kid draw up a detailed budget, first determining how much he'll need for fixed expenses and then how much he can afford to spend on food, coffee, clothing and other costs routinely racked up at college. Remind him to budget for big expenses such as travel to and from home, ski trips or friends' weddings, plus unexpected expenses such as car repairs or concerts. Depending on his money management skills, you may decide to give him the semester's funds upfront or dole the money out month by month. Either way, emphasize that it's important to pay attention to where his money goes.
"It's always food," Chatzky says. "When I went to college, most of the money that I didn't realize I was spending went for coffee and bagels. That has not changed."
Here are eight money management lessons your son or daughter needs to learn before heading off to college.
1. Make a budget and stick to it. We all do better if we know how much money is coming in and pay attention to what we spend. Whether she uses apps, online tools or a spreadsheet, your child needs to learn to live within her means and stay within her budget.
2. Borrow as little as possible. Student loan funds are for tuition, books and basic living expenses, not clothes and meals out. Andrea Woroch, a consumer finance expert in California, kicks herself now for using her student loan funds for a spring break trip every year — trips that become very expensive if you're still paying for them years later. "You don't want to be one of those graduates with huge student loan debt," Woroch says. Suggest that your college student discuss any potential loans with you before signing them. Just because you can borrow doesn't mean you should, and comparison shopping for loans is a good idea.
3. Take your education seriously. What you learn and whom you meet will affect your life for years to come. The professional contacts you make in college are people to which you'll remain connected throughout your life. But if you fail classes, you risk delaying graduation and will end up spending more money on additional classes and fees, which parents might want to state upfront they will not pay for.
4. Keep an eye on your checking account. It's up to the family whether your son's or daughter's account is linked to yours, so you can pay attention to his or her spending. If you're funding the account, you might favor that option for both convenience and to assist with monitoring transactions. Either way, your child needs to monitor the account to make sure all the transactions are valid and there is no chance of overdrafts, which are costly. Emphasize that those come at his or her expense and suggest apps, email and text alerts that make monitoring easier. Make it clear that passwords and PINs should not be shared with roommates and significant others.
5. Use credit cards sparingly. Weston and Chatzky advise adding your student as an authorized user on your credit card so she can begin to build credit. Make sure it's clearly understood what expenses can be charged and what you believe constitutes an emergency. "It's just way too easy to use plastic," Chatzky says. "I think it's a good idea to help your child learn to use credit wisely." The Credit CARD Act of 2009 significantly curtailed marketing of credit cards on campus, essentially requiring those under 21 to have either a job or a parent as co-signer.
6. Shop smart. It is not necessary to spend hundreds of dollars on new décor for a dorm room or apartment. In most cases, used furniture and decorative items are significantly cheaper and will work just as well, Woroch says. Used clothing and generic products are other ways to economize. Shopping smart should also extend to textbooks. Never buy books until classes have started and you're sure which ones you'll need. Renting texts, buying used, sharing with friends or buying older editions are all ways to save.
7. Part-time work is a good option. Many parents don't want their children to work while they're in college, but it's a rare undergraduate who doesn't have 10 hours a week to spend on a part-time job. Not only does this provide additional income, it's also good experience.
8. Learn to cook, clean and do laundry. People who know how to cook (and actually do) save thousands of dollars over those who eat out all the time. Knowing how to do laundry keeps clothes from being ruined, plus keeps your child from bringing dirty clothes home to you on visits. If your student lacks any of those skills, suggest he practice them in your house before he leaves.
