What Your College Freshman Should Know About Money
The National Foundation for Credit Counseling’s 2014 Financial Literacy Survey suggests that many American adults know little about the basics of personal finance. If you’re a parent of an incoming college freshman — an adult who is likely just beginning his or her financial journey — these findings should worry you.
“Parents put a lot of time and money into preparing their child to leave home but often neglect the basic life skills associated with personal finance,” says Gail Cunningham, spokesperson for the NFCC.
Because financial education is often lacking in schools, it’s typically up to parents to teach soon-to-be freshmen how to manage their finances. They need to teach them how to track their purchases, practice responsible debt habits and create a budget that keeps them from spending their monthly meal money in just three days.
“It can be a free-for-all for kids just starting college,” says Kimberly Foss, founder and president of Roseville, California-based Empyrion Wealth Management. “It’s like sending a kid into a candy store with unlimited funds.”
Sobering numbers
The NFCC survey found that most adults say they learned their personal finance habits from their parents. Unfortunately, parents are not always the best teachers. More than four in 10 respondents to the survey gave themselves a grade of either C, D, or F for their mastery of personal finance.
Cunningham says it should not be surprising then that so many young people enter their freshmen year of college with little knowledge of how to manage their money.
There is good news, though: Parents can help by giving their incoming college freshmen a crash course on smart financial behavior.
Foss says that the most important step parents can take is to teach their future college students how to create a simple budget. Freshmen can then learn how to track the money they have coming in each month against the money they are spending on pizza, movies, food plans, and other expenses. Parents should check in with their sons and daughters once a month to track how closely their children are sticking to the budget.
And if their sons and daughters have already spent all of their month’s entertainment dollars by the 15th? Then, these freshmen have to realize that there won’t be any extra money coming for movies or shopping trips until the new month starts.
“They have to be accountable,” Foss says. “If they’re not accountable, then there’s no point to them even having a budget.”
Some parents might choose to follow Foss’ jar method. When Foss’ older daughter went to college, Foss says she told her to withdraw her spending money at the start of the week. Foss’ daughter then put half of this into a jar dedicated to the week’s core expenses, the items she absolutely had to spend money on, and items like food and gas.
The rest of the money went into a jar for discretionary spending, the money she would spend on entertainment. This helped Foss’ daughter avoid spending all of her food or gas money on trips to the mall.
It’s also important to teach college students how to become savers, Foss says. Parents should teach those college students who have jobs to set aside a portion of every paycheck — even if it’s just $20 — into a savings account.
This habit can have a positive impact on the rest of the student’s life, Foss says.
“The idea is to create lifelong savers,” she says. “If you can save during the starving times of being a college student, you should be able to save even more once you are out in the real world with a real job.”
Lessons on credit cards and checking accounts
Foss says that parents should also help their new college students open a checking account. They then need to teach their children how to write a check and how to balance a checkbook.
These are more simple of the financial skills that can stick with students for their entire lives, Foss says.
Many parents worry that their children will apply for scads of credit cards once they arrive on a college campus. And once they get these cards, parents fear they’ll run up huge amounts of credit card debt.
Thomas Racca, manager of personal finance at Navy Federal Credit Union in Merrifield, Virginia., says that parents can help their children avoid such a financial disaster by teaching their freshmen how to handle credit cards effectively.
This includes teaching these students the importance of only charging what they can afford to pay back in full at the end of the month, Racca says.
Parents can start their freshmen with a secured credit card with a small spending limit, say $250. As freshmen learn how to use this credit — and learn the importance of paying their credit-card balance off each month — they will begin building a credit history. A strong credit history can help them after they graduate from college, Racca says.
“A lot of parents worry about giving their children credit cards. But learning how to use credit is an important lesson for young people,” Racca says. “The good news is that the days of college students signing up for credit cards just to get free T-shirts are largely a thing of the past.”
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