Making Cents With Your College-bound Kid
The Financial Conversation You Need to Have with Your Child Before They Leave for College
By Donna Skeels Cygan | 8/1/2014, 1:56 p.m.
Help your child work out a monthly budget. In college your child will be responsible for managing her monthly budget, which might include paying for food, transportation, entertainment, laundry, clothing, and more. If she’s like many students, this will be her first experience at managing a budget, and she’ll quickly find that expensive outfits, frequent pizza deliveries, and daily $4 lattes aren’t sustainable.
Talk about how to resist financial peer pressure. Your child is likely to meet students who don’t put much thought into their spending habits. One acquaintance may have “Daddy’s credit card,” for example, while someone else may be using his own credit card with little thought toward the consequences. And if all of your student’s friends are eating out at restaurants, indulging in shopping sprees, and going to see a new movie each weekend, he might be tempted to do the same.
Keep in mind that ‘The Joneses’ go to college, and keeping up with them can quickly drive your child into a financial hole.
Beware of plastic! During your child’s first year on campus, she’ll probably have the opportunity to sign up for a credit card. Encourage her to think long and hard (and talk to you!) before doing so. In some cases credit cards can be a lifesaver because they allow you to pay for basic necessities during emergencies, but much more often, they lead you down a slippery slope and into a black hole. If your teen doesn’t have the cash for something and doesn’t absolutely, positively need it, tell her to say no and start saving.
Encourage your student to start a savings program. Whether you’ll be providing your student with an allowance or he’ll have a part-time job (or a combination of both), save some of that money if your student’s budget allows. Immediately after he receives his allowance or paycheck each month (let’s say that adds up to $200), encourage him to put a predetermined percentage (say, 15 percent) into his savings account. In this example, that’s $30 a month, which will add up!
Specifically, talk to your child about opening a Roth IRA. If your student is working during college (or perhaps only during the summer), I strongly recommends that your child put some of the savings into a Roth IRA. Your child can invest up to $5,500 per year, but she/he must have earned income of at least $5,500 to contribute the full amount. (If the earnings are only $2,000 from a summer job, for example, they can contribute any amount up to $2,000.)
And if it seems too early to begin contributing to a fund that’s typically used in retirement, think again! If your child contributes $5,000 to her Roth IRA for 10 years, their contributions will total $50,000. However, if the account grows 8 percent per year, its total value at the end of that 10-year period will be over $75,000. The point is, the earlier your student starts contributing, the more her money will work for her. This is the power of compounding.
Parents, think of this money management discussion as your parental contribution to freshman orientation. The budgeting, spending, and saving habits your student forms in the coming months and years are likely to stick around long after graduation. By providing sound guidance, you’re making an investment in your child’s long-term security and happiness.”
Donna Skeels Cygan is the author of The Joy of Financial Security: The art and science of becoming happier, managing your money wisely, and creating a secure financial future (Sage Future Press),)www.joyoffinancialsecurity.com