About 10 years ago, in an effort to help our kids learn skills for managing their money, my husband (a CPA I need to add) brought home a legal-sized spreadsheet (yes, spreadsheet!) to share with the family at dinner time.
“Kids, this graph represents the lifetime earnings for a mutual fund. If you had invested a hundred dollars in 1950, thirty years later you would have….”
Honestly, neither of our kids really heard how much the return on investment was after 30 years. In fact, I'm surprised they even remember the conversation. They just remember that their father was passionate about imparting his financial words of wisdom. All the time.
Welcome to Adulthood Where Everything Is a Bill!
The family calls him “Keepin’ It Real Kyle” because he doesn’t believe there is ever not a good time to talk about financial matters and the realities of how much it costs to be an adult.
As emerging adults themselves, our kids can now mockingly repeat their father’s pearls of wisdom: “When is a good time to save? Yesterday!” and “Do you know the beauty of compound interest?”
We certainly have a great time teasing him about his sometimes-unsolicited advice, but we all must admit that he has set them on a path to developing skills in managing their money.
How can you help ease your college student into financial freedom? Here are some tips for what to talk about and when.
A Dollar for Your Thoughts
The first thing that we did was talk early and often about money. At different ages, we talked to them about different aspects of finances, but we were always an open book.
While you may have a need for privacy in some matters, these topics can be a starting point.
Talk about how much things cost. When we casually asked our daughter once how much she thought we paid for the internet each month, she blurted, “$700!” We got a good laugh about that. Then, we realized she had no frame of reference, and so we started sharing the costs of basic utilities, services and goods.
Discuss costs of living. If you don’t want to speak specifically about your salaries and expenses, then talk about general costs of living in your community. This is a good opportunity to discuss how our choices (where to live, what to buy) can affect our money management practices.
Be honest about what you want to afford. Instead of always telling our kids we “can’t afford that," we preferred to tell them we did not want to afford that. This helped them understand that, even when we had the disposable income, we were making choices based on our values and our long-term plans.
I Know You Want It, But Do You Need It?
I believe it was Shakespeare who wrote, “Get thee to a budget manager!” Maybe it wasn’t Shakespeare, but it's sound advice for entering college students as well as soon-to-be graduates.
Teach them how to budget. This is, by far, the most frequently requested skill college students want to learn. And there is nothing more frightening to young adults than having no clue how to manage their money.
Track income and expenses. There are many apps and websites that can assist in the tracking of money, but a good, old fashioned spreadsheet (a spreadsheet!) can do the trick. Ask them how they will the generate income (savings, part-time job, allowance) and what do they expect to spend their money on?
Chart a budget for a week, month and semester. If your college student earned $2,000 over the summer and oversees managing it throughout the academic year, they can look ahead at what they may be spending and start making informed decisions. If they want the money to last all year, they'll need to spend no more than $250 a month or about $60 a week. This exercise can bring clarity to their budget.
Discuss ways to reduce expenses and increase income. If they are not satisfied with their budget, you can help them brainstorm ways to make adjustments. Can they rent their books instead of buying them? Can they work on campus 10 hours a week to earn more money? These are good exercises in dealing with a budget later on in life.
Insuring the Future
When we started preparing our daughter for life after graduation, we remembered to talk about insurance. What she should get, how she should shop around for it, and what we would still pay for.
Health insurance? We will keep you on ours until you find a steady full-time job. Renters insurance? You can afford that on your own. Car insurance? Let’s talk about that further.
Understandably, she had anxiety about all of this and needed some guidance.
Help them determine their insurance needs. This is where you will determine what you may continue to pay for and what is reasonable for them to take on. We are taking the graduated approach to our new college graduate: Let’s ease you into the costs as you get your feet under you.
Encourage them to shop around. No doubt you know someone in the insurance business and can point them to people who can help them find competitive quotes. Review the different offers with them to help them make a final decision.
Suggest that they monitor their needs and make changes. Getting older, buying a new car, adding more furniture and electronics to the apartment all can signal a change to their insurance needs. Teach them to check in each year with the company or agent for review.
A Penny Saved Is a Penny That Can Compound to $10
Saving and investing seem like luxury topics, especially for college students or recent graduates. While my kids now budget for saving part of their income (even if it's summer job), it may be difficult to convince your young adult that it is necessary.
Don’t skip this part. If you don’t feel comfortable talking about investments, 401Ks and emergency funds, find someone in your community who can.
Learn about compound interest. If you haven't seen examples of how $1,000 invested over 30 years without adding to it can grow to over $10,000, then make it a family night activity. Websites such as SmartAsset provide investment calculators for this very purpose.
Be prepared. Young adults will learn too quickly that emergencies happen and that the dream vacation they were saving for now needs to cover a new AC unit. Helping them prepare for tough times is essential to their long-term financial skills.
Invest in the future. Whether your young adult is starting a full-time job after graduation, or just working odd jobs while in college, encourage them to set up a retirement account. A financial advisor can help you choose the best option depending on your student’s situation and income level. It's never too early, according to my husband, to let compound interest work its magic.
There are no certainties in parenting, but I feel pretty confident that my kids are in a far better position financially and mentally than if we had not prepared them for leaving the nest and paying their own way.
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Amy Baldwin, Ed.D., the former Director of Student Transitions at the University of Central Arkansas, currently teaches student success and literacy to first-year students. She is co-author of a number of books, including A High School Parent's Guide to College Success: 12 Essentials and The College Experience. Amy and her husband are parents of a college student and a recent college graduate. She also blogs at www.higheredparent.com.
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