Your college freshman will soon be on his or her own, ready to tackle new experiences. This means that he or she will have to make decisions about how to handle money, possibly for the first time. However, the Bank of Mom and Dad won’t be open 24/7. So, here are five money lessons for a student to take along.
1. Have a spending plan
Budgeting is a dirty word to many, but it’s really the same as having a spending plan. Tracking where the money goes — and looking at the numbers — will help students make smarter spending choices and keep them from spending money they don’t have.
First, show your student how to figure out how much is needed each week. That’s the amount he should put into an envelope and use for seven days, says Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Fairfield. Then, she won’t need to carry an ATM card or credit card, which may tempt them to spend and go over budget.
“That especially holds true when you are going out with friends,” Lynch says. “People spend more and make really bad decisions after having a few.”
There are plenty of websites and smartphone apps, such as Mint.com, which help track spending, says John Zeltmann, a certified financial planner with RegentAtlantic Capital in Morristown. He recommends students also set up a spreadsheet in Excel or Google Docs to monitor weekly activity in their checking accounts. Week by week, there should be a section for cash flow — money from college jobs or gifts from mom and dad — and another section to subtract expenses.
“Extrapolate this cash flow into the future, four to eight weeks, or even further if you can, trying to include all minor and major expenses and inflows you can think of,” Zeltmann says. “By revisiting this tool on a regular basis, you can keep track of any instances where you might run short on cash in advance rather than realizing your checking account balance is going negative tomorrow.”
Learning how to budget now will help your student for a lifetime.
2. Stay away from credit
Credit cards are convenient, but they can be dangerous. Lynch recommends that students have a card, put it in a zipped plastic bag, fill it with water and stick it in the freezer. If the student has to go home and defrost the card, and then go back to a store, he’ll have time to think about whether or not he really needs the purchase. “This really eliminates impulse spending,” Lynch says.
3. Avoid bank fees
If your student uses a cash budget strategy, there’s no reason to ever incur ATM fees, bounced check fees or other costs related to a checking account.
Help your student choose a bank that offers a fee-free ATM near the student’s college home. If the only free ATM offered by his bank is far away, consider switching banks. Fees for late payments, over-the-limit credit spending and annual charges for a credit card are a no-no.
“Any time a bank is offering a benefit for which you have to pay a fee, rarely does it make sense from a cost/benefit standpoint for a college student,” Zeltmann says.
4. Have a cash cushion
When money is tight, it can be painful to leave a lump sum on the sidelines for emergencies. But when something goes wrong, having that fund will help your student avoid bad money decisions.
“Plan A never works. Plan B is having cash on the side that allows you to get out of problems,” Lynch says. “The car will always break down, something will be more expensive than planned and there is always a need for some extra cash.”
Lynch recommends that your student have money in an account on the opposite side of town. Make it inconvenient to access — no checks or ATM card — at a bank that’s not open at night or on weekends.
“If you really need the money, you can access it, but it is really a pain,” he says.
5. Manage student loans
Your student may already have student loans to worry about, but think hard and creatively about finding alternatives so he or she isn’t saddled with debt for the next 20 years. Lynch says he has clients in their 40s, with advanced degrees and who earn a good living, but who are broke because they still have student debt.
“Debt is an anchor that will drag you down,” Lynch says. “Taking out a loan at the time may seem painless. However, paying it back over the next 10 to 20 years means that you will struggle.”
Zeltmann recommends looking at other kinds of financial aid before committing to additional loans.
“Don’t discount the benefit of work-study programs, grants, scholarships, awards or any other type of financial aid,” he says. “Each dollar you earn in financial aid is a dollar you don’t have to take in the form of a loan, which, down the road, will have a substantial interest rate attached to it.”