As your student embarks on their first year of college, you’ve helped to prepare them with the necessary tools for their transition into a more independent lifestyle. One of the most important skills to develop during this transitional period is financial literacy. Successfully creating and following a budget is an essential skill that will serve your student through college and into their adult life. We highly recommend that you sit down with your student and talk them through the following basic financial literacy principles before they start on their path toward independence.
Whether your student is working and/or receiving an allowance, it’s important that they have a plan to keep track of their own spending on a monthly basis. Though many of these principles may feel like common sense to you as an adult, remember that this can be new and confusing information for your student.
Sit down with your student and calculate an estimate of monthly expenses. Take into consideration the cost of essentials, such as transportation, food, and other necessary supplies for academic or personal purposes. If your student is on a meal plan, it is likely that they will not be spending a lot of money on food each month, but they might want the option to eat off-campus or purchase their own groceries. Then discuss the allotment for non-essential purchases, such as going out with friends to movies or concerts. For the latter especially, encourage your student to be honest about the potential costs of their activities, but remind them that they should be prepared to realistically self-regulate in terms of non-essential spending.
If they are living on campus, your student will most likely not have to pay rent or utilities, but those are certainly important elements of a monthly budget once your student moves into their own living space. If your student does move off campus, their budget will have to be reconsidered in light of new costs and any other changes to their lifestyle.
If your student plans on working a part-time job while they are enrolled in college, make sure they understand their paycheck breakdown so the amount available for spending is clear. Explain in detail how gross income is what we earn, but net income is what we get to spend after taxes and other reductions.
Responsible credit card use
You may choose to equip your student with a debit card that subtracts money instantly from a checking account as they make purchases, or you may decide that a credit card is the better option.
A credit card allows your student to make purchases and then pay back their bills at the end of the month. One of the key advantages of a credit card is that it consolidates one’s bills into a single payment, but that payment must be made in a timely fashion.
Remind your student that they must pay their credit card bills on time, in full, every month. Building a good credit history by maintaining these practices will also serve your student in the long run when it comes to applying for apartments or taking out their own loans. Make sure your student is aware of the interest rates and late fees associated with missed credit card payments: these can add up quickly in a short amount of time and also damage their credit score.
You can encourage your student to set up auto-payments, which come out of a linked bank account and get sent automatically to the credit card company at a specific time each month. Your student may set up a minimum auto-payment amount in order to avoid late fees, but they still need to remember to pay their entire balance at the end of the month if they spend more than their minimum auto-payment accounts for. Doing these monthly payments in two steps helps to emphasize the difference between late fees—penalties for tardy payments—and interest charges that continue to compound if they don’t pay their bill in full before the due date.
To avoid overdraft fees from their bank as well as late fees from their credit card company, your student must remain cognizant of the amount of money in their linked bank account. If your student is receiving a monthly income from a job and/or an allowance, they need to be sure that their spending doesn’t exceed this balance. This is the essence of good budgeting.