It’s never too early to begin discussing the concept of money and personal finances with your children. In fact, some financial experts suggest these conversations should begin during elementary school.
For parents who missed that boat (and you’re not alone if that’s you), all is not lost. It’s even more critical to sit your child down and talk about effective personal finance management as he or she is preparing to leave the nest for college, a time in life when they’ll be faced with credit card offers; signing onto student loans, and, in many cases, living on their own for the first time.
“The earlier you can have these conversations with your child, the better,” says Elizabeth Cady, of Denver-based EP Wealth Advisors. “People lack these skills that carry over into adulthood and that can cause a lot of problems in meeting financial goals.”
EP Wealth advisors feels so strongly about the importance of having such conversations with young children, the company has taken it upon itself to visit schools to discuss financial literacy. With the start of the new academic year just around the corner, here are some of the key money conversations to have with your college-bound child.
Though this may seem like an incredibly basic concept and skill, budgeting is not something that comes naturally, particularly for a young adult who’s never had to do it before.
“The increased freedom and independence (of college) can easily lead to overspending,” says Cady. “You have to make sure they understand how much they can spend on discretionary items. For example, what they have earned from summer jobs or an agreed upon allowance will be the funds they’re going to have available for eating out and social activities.”
Parents who don’t necessarily feel comfortable leading such conversations might consider enrolling their child in an online literacy course before they leave home.
Bringing the family financial advisor into the conversation is yet another option, says Mike Broker, managing vice president of Trilogy Financial.
“I meet with many of my clients’ college-bound teenagers to walk them through what a basic plan looks like and how decisions can impact their future,” explains Broker. “Sometimes that’s because the parent is not as knowledgeable, and sometimes they want me to meet with their child because they’re more likely to listen to me.”
It’s also a good idea to start letting your child make financial decisions before they leave the house, adds Broker. That way, they’ll be more prepared to handle the responsibility and consequences of their choices on their own.
Credit card companies send representatives to college campuses around the country with goal of encouraging students to sign on the dotted line. These representatives will offer free t-shirts and other swag to sweeten the deal.
All of which makes talking to your student about credit cards even more imperative, says Norma LaFonte, co-author of “Money Monster or Money Master: Teach Your Kids the Basics of Money and Have Them Love Every Minute.”
Explain to your children how easy it is to spend tomorrow’s money today once credit is obtained, Lafonte says. “Help them understand how and when interest is applied, and how less than a full payment on what has been charged will result in interest charges,” she says. “Credit cards are a part of life, but learning how to manage them is critically important.”
It’s also a good idea to make sure your child understands some of the basic definitions and terms associated with credit cards, suggests Julie Pukas, head of US Bankcard and Merchant Services at TD Bank. In other words, cover such things as credit utilization ratio, credit score, interest rate and minimum payments.
With all of this ground covered, keep in mind that college can be a good time to begin building credit, if it’s done responsibly.
“They need to learn about judicious use of credit,” says Michael Gerstman, of Texas-based Gerstman Financial Group. “I advise use of credit cards but think of them as a debit card. If you don’t have the cash on hand to make your purchase now, then you should not be making the purchase.”
It can be easy for students to head off to college with no real understanding of how much their education will cost, particularly if it’s the parent, not the child, footing the bill.
“Make sure they’re clear on how much is being spent to put them through college, so they’ll take it seriously, whether you’ve made the investment or your child is taking out loans,” says Adrian Ridner, CEO and co-founder of Study.com.
In fact, many financial advisors suggest that if a child doesn’t have skin in the game and isn’t paying for some portion of their education, they may be less inclined to work hard and do well in school. When the student assumes responsibility, however, that dynamic changes.
“The student needs to take their education and attending classes seriously, since this could be debt that will be paid for many years,” says Cady.
You may also want to discuss your child’s major or field of study in association with student loans, identifying careers that will make it easier to pay those loans when they come due, suggests Russel Rivera, president of Voice Wealth Management in New York City.
Keeping Costs Down
A typical 15- or 18-credit class load is not a full-time job. There will be plenty of time left over to do other things. And one of those things could be a part-time job.
“Have a conversation about what they could do with the rest of their time,” Broker advises. “One thing they could do is find a job to keep their total loans down when they graduate. Every dollar counts.”
In addition, not all course credits need to be earned on a college campus. Some courses can be taken online less expensively, and your child might be able to test out of some general education requirements, potentially saving thousands of dollars, suggests Ridner.
And when it comes to minimizing costs, you may also want to discuss the impact associated with changing majors.
“If your child changes majors even once, they may have to stay in college longer and spend more on tuition to fulfill those new requirements,” Ridner explains. “Make sure they understand the importance of knowing what they want to do before committing to a major.”
College Is an Investment of Both Time and Money
College is more than just checking off the next box. For all intents and purposes, it’s an investment in an individual’s future earnings ability and it’s investment of two, four, or even six to eight years of your life. This is an important concept to impress upon your child.
Explain to your student that even if they’re not bearing the financial cost of their college education, they’re making the time investment that it takes to graduate — an investment that will impact their lives for years, if not decades, to come.
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