The day has finally come. After 18 years of laughter, tears, and arguments, you finally get the house to yourself- your kids are heading off to college! (Feel free to do a little dance and jig right here if it's in you) Starting college is a huge step in your kids' life, so you want to make sure that they start off on the right financial track for two reasons:
- The can begin their life without falling into the many financial traps that most young adults do.
- You prevent them from falling into those financial traps which ultimately leads them to moving back home. (No more dancing and jigging).
Nonetheless, this is advice that I wish my parents would have given me. There are things in life that are worth learning the hard way. Climbing out of a pile of debt is not one of them. Here are 7 financial tips to help your kids get on the right financial track as they head off for school.
1. Run Their Credit Report
It might seem premature to run the credit of an 18 year old, but it's a good life lesson. There might not be a whole lot of activity on the report (and hopefully no deficiencies!), but at least your child will learn a few things.
- They'll now how to access their credit report for free.
- They'll learn that they can request their credit report once per year without hurting their credit.
- They'll have a good introduction into the credit system of how it works and why it's important to have good credit.
I didn't access my first credit report until my later 20's and was floored to see how many credit cards I had applied for over the years. I also found an old gym membership that was showing as delinquent and I didn't even know! Thankfully, I found it and made a few phone calls and got it fixed. Don't let your kids find out the way I did.
2. Give Them The Talk- Credit Cards That Is
We all know how easy it is to fall into the credit card trap. Sallie Mae reports that of all college students 84% have at least one credit card and 34% have a balance of at least $3,174. When I was in college, I had gotten myself even worse than that. A few things that your kids needs to realize is that just because they have a $1,000 credit card limit, doesn't mean that have to charge $1,000. Credit cards are for emergencies and not for convenience.
A simple exercise of running some numbers to demonstrate how long it would take to payoff a purchase if only the making the minimum payment will be a major eye opener for many kids. Using the credit card calculator, I simulated an iPad purchase for $800. Making a minimum payment of $15 a month would take your child 60 months (Five Years) to pay it off. That means that if your kids bought the iPad when they were a freshman in college, they would still be paying for it a year after they graduated!
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3. Be Careful of Student Loans
Student loans, like credit cards, have become too common place in our kids financial lives. Student loans should be used to pay for school and school related expenses, period. Many students apply for the loans to use as extra “spending cash” with the mentality that they can just “pay it off later”. BIG MISTAKE!
I've heard this similar line from several college students, “I should only have around $30,000 in student loans when I graduate”. Only!?
Listen, if you have to have student loans, then I completely understand. But don't treat the $20,000, $30,000, or $40,000 or whatever your amount is as “only that amount”. When you graduate and start your career you are going to have to payoff those student loans, the less debt you have the better. If it takes working part time (See Point 6), applying for scholarships or grants, then do it.
4. Budgeting 101
The best prerequisite class that you can make your child take is budgeting. Since this doesn't classify as a general study, you better teach it at home before they leave. Your child needs to understand the basics of monthly inflows and outflows. They need to understand the ramifications of eating 4-5 days per week and how that affect their other spendings. You want your child to go out and have a good time, not just too good of time that it sets them back financially.
5. Bank Check
A major step in your kids financial development is how they manage their checking and savings accounts. Your child needs to be aware of all the little hidden fees that bank charges as well as the ramifications if they bounce a check or miss a payment.
This will also be a good time for them to start being conscious of interest rates and how much they are getting paid on their money. If your child already has the knack for shopping, have them apply that in shopping for the best interest rates that the local banks have to offer.
6. Part Time Job
With their new found independence, your child will mature rapidly through their college life. One way to add another layer of responsibility is to encourage them to find a part time job. Many universities offer positions on campus that are flexible for your kids tuition work load. They can also venture out to the local malls or restaurants and look for a good paying position. Having a job will teach them the importance of managing a schedule and their paycheck. The extra income could also help alleviate many of the tuition and fee costs of college. Working a little harder today to have an easier and brighter future down the road is a mantra that I'll always buy into.
7. Time to Invest
It’s never too early to teach them the fundamentals of investing. If they do get a part-time job, make sure the understand the wonderful potential benefits that a Roth IRA offers them; especially starting at a younger age. I’m envious of any 18 year old that has the foresight to start a Roth at such a young age.
Have you recently sent your child to college? What lessons did you teach them or wish you would have taught them?