When I was in college, I learned the reality that students are taught very little about personal financial planning. Unfortunately, this means that most students are ill equipped for the real world upon graduation.
College is a great time to learn about personal finance because many people begin managing their own finances once they graduate. The following nine steps are a great way for your college student to learn how to begin managing their own finances.
1. Get a Job
Working while taking classes and balancing student life can have a very profound effect on a student's life. They learn to balance their time and understand how hard they have to work. They’ll start seeing the impact of taxes on their paychecks. Although they can party until 2 a.m., they still have to find a way to balance that with a job. When I attended university, I worked part-time at the local Morgan Stanley office and taught squash on the weekends. The life lessons I learned were much more important to me than the extra few dollars in my pocket.
2. Paying Expenses
There is a clear difference between paying one's expenses and being responsible for them. For this, I suggest making your children accountable for paying the cable bill or their rent. I never paid one expense myself until I graduated. Because of this, I didn't learn about managing my own finances.
Once college students graduate, they'll likely be suddenly responsible for many bills. Do them a favor. Have them get accustomed to financial organization by paying a recurring bill or two.
3. Taking Charge of an Expense
Now that your college student pays some bills, why not give them a bill to actually be responsible for out of their own funds. Whether it's from a summer job or some form of employment during the semester, giving them accountability has a multitude of benefits.
Being in charge of at least one expense, if not all, will start preparing them for the way the world works. They must first earn the money and then plan accordingly before spending it. This also could teach them about saving for delayed gratification, instead of thinking about getting everything they want immediately.
In the adult world, you're usually paid on a regular basis. From those funds, you must budget and plan for what is expected and isn't unexpected. Then, you make sure your income covers your monthly expenses, otherwise you simply can’t afford to live that lifestyle.
We shouldn't treat our independent college students any differently. Have them build a budget and present it to you. Then, you can determine what you are willing or able to pay towards this budget. From there, let them know the amount, so they can adjust their expenses or find other means to cover the shortfall.
Finally, try giving them these funds as a paycheck every two weeks. This forces them to focus on living within their means and get used to how the world works. If the money runs out two days before the next paycheck, they’ll have to get thrifty. If there are leftovers, party on!
5. Match Retirement Savings
Your children may not earn much during the school year or their summer job, but what they do earn can be saved into a Roth or traditional IRA. Why not reward them if they begin savings for their future? One way to motivate them would be to give them a defacto match. Whatever they save for retirement, you’ll give some form of match to add into their IRAs.
There are many advantages to this. First, they’ll start learning how to save out of their funds. Second, it will force them to learn about the investment universe, as they’ll need to figure out how to invest these dollars. Third, they will have a huge head start on their retirement nest egg. A savings mentality will begin to build in their psyche.
6. Credit Card
Naturally, I’d tread carefully with credit cards, but getting a credit card in your child’s name is a great way to start building their credit. Of course, they shouldn't apply for a high limit one because this is just an exercise to get started and to teach credit experience. Make sure you review this bill with them on a regular basis to avoid unforeseen surprises. Remember, you may have to co-sign with them depending on earnings history. This means your credit will be affected if they don’t pay on time.
Taking all that into consideration, the goal is for them to learn respect (and fear) of credit cards. No one wants them to grow up to be a chronic abuser. However, when they go to get that first car or home, having healthy credit will be huge.
7. Understanding Income Taxes
If your college student has some form of income, they’ll be filing taxes. Have them do it with your accountant, or at the very least bring them into those meetings. Their taxes shouldn’t be that complex, so begin that dialogue and relationship with your accountant. Hopefully, it’ll be something they can carry forward into their working years.
Taxes can be a mystery to us all. They are complicated and painful. To be confident and not fearful of taxes, bring your college student in on this aspect of adult life. Plus, it will be helpful for them to actually understand where all of their hard-earned money is going.
8. Estate Plan Documents
Too many adults don’t have a will or estate planning documents. Even college students should have something in place.
They certainly don’t need a long and complicated estate plan. At the very least, get them something basic. Documents discussing their medical wishes should something happen to them is a prime example. Tragedy can strike at any age. Now that these college students are technically adults, they are entitled to their own opinions and wishes.
Get them a basic power of attorney, a healthcare proxy and maybe a living will or will, as well. It won’t cost you much. It's time for your college student to think about protecting themselves and others. It's important for them to have this responsibility. Hopefully, they'll want it too.
9. Loans, Financial Aid and Scholarships
As the parent, you should not be responsible for filling out that Free Application for Federal Student Aid (FASFA) paperwork or applying for their loans. You should not have to find the scholarships to save money. As a busy professional or executive, your lives are busier than theirs. Applying for loans is something every adult will do. We get car loans, mortgages, and maybe even a business loan.
Make them responsible for applying as practice and lessons for later in life when they will apply for other loans. They should learn how the system works and realize that they are responsible to pay back the money that they borrow. If they are actually involved in the process of applying for their loans, they will have a much better understanding of how the process works than if you do the work for them.
If you can instill some of these principals into your college student's life, they’ll graduate and be better prepared for independently managing their finances. They’ll actually be somewhat ready for the real world and the immense duties thrust upon them.
Recent articles by Andrew Rosen: Involving Your Kids in Financial Planning
Disclosure: Financial planning and Investment advisory services offered through Diversified Financial Consultants, LLC, a registered investment advisor. Securities offered through Securities Service Network, LLC, Member FINRA, SIPC . Associates of Diversified Financial Consultants are registered representatives of Securities Service Network, LLC, a registered broker/dealer, 9729 Cogdill Road, Knoxville, TN 37932. (800) 264-5499.