Discussing Finances with Your College-Bound Teen
The first week of college is an exciting time for recent high school graduates. Their newfound freedom can be intoxicating, motivating them to do and see everything they can. Though doing everything is likely to cost money which means the first week of college is also about a great time to learn how to budget. Be sure to impart these key financial lessons before your co-ed starts fall semester to set them up to thrive in their new environment.
Master the Basics of Budgeting Early
Live like a broke student now, so you don’t have to live like a broke adult later.
Here’s what that means in practical terms:
Building good habits when someone is just starting out in the world is a great way to establish good habits later in life as their income grows. The first step is making and following a comprehensive budget. Tracking where every dollar is going is essential. In a world of automatically renewing subscriptions, it’s even more important to keep track of where your money is going. A good rule of thumb is the “50-30-20” rule as a guide: 50% needs, 30% wants, 20% savings or debt repayment (even if that “savings” is just reducing the need for loans).
Differentiating between “needs” and “wants” can be hard for a young person. This is a chance to explain the criteria you use, and work through some examples with them to ensure they understand.
A few basic budgeting tips include: open a savings account, automate small contributions (even $10/week) to it, learn to comparison shop, and avoid lifestyle inflation when income eventually increases.
Learn about Investing Early
"Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it." - Albert Einstein
It may be hard to convince an 18 year-old who hasn’t started a career yet that they’ll be in their 60s and want to retire; but, as anyone who’s saved for retirement knows, getting started saving early is the best way to ensure financial freedom in retirement.
Consider the following scenario: you invest $300/month until age 65 with an average annual return of 7%. . Someone who starts at age 30 will have contributed $126,000 over 35 years and have a portfolio value of $342,000. By contrast, a person who started a decade prior will have contributed $162,000 over 45 years and will realize a portfolio value of $725,000. That extra decade of growth—without investing a penny more per month—more than doubled the final nest egg. That’s compound interest at work. Your returns start earning returns, and over time, those gains snowball. Building a good practice of investing, even if it’s $10/mo, can set your college student up for financial success later in life. If they have earned income, you can set up an IRA for them (even before they go to college) to realize additional tax benefits on those early investments.
Good Credit vs Bad Credit
One thing that hasn’t changed since we were in college is that banks still want to hand credit cards to 18-year old kids. It’s a great idea for the banks because of the amount of interest and fees they stand to make. Sometimes, it’s not so great for the kids who may get an early lesson in the effects of bad credit and high interest costs if they don’t pay the bill.
Parents should have a detailed conversation with kids regarding credit cards and spending before sending the kid off to college. Whether or not you think it is a good idea for your son or daughter to have an “only in case of emergency” credit card, young people will eventually deal with the concept of unsecured credit from banks and the potential negative implications of mismanaged credit. In general, it’s best to get them thinking long-term, not just about the next semester. Networking, internships, and skill-building often matter more for career success than grades alone. If they remember one thing, let it be:
Your future self is watching. Every financial choice you make today is either giving them a gift or sending them a bill.
No matter how well the conversation goes, it’s good to have reminder sessions and discuss specifics about financial plans. Your HCM advisor is available to speak with you and your student as they enter the adult world & undertake its many responsibilities.