Ask any 18-year-old entering college about interest rates, 401k’s or budgeting and chances are you’ll be stunned at his or her limited knowledge about personal finance.
We know the basics are not taught in most high schools, and don’t expect their new professors to show them how to open a bank account, sign a check, pay bills or manage a budget. Instead, the onus is on parents to cover the fundamentals and ensure their children don’t go completely broke once they leave the house.
If one of your own is going off to college this fall, it’s important to offer a crash course in personal finance. Here are a few lessons to cover:
< Lesson 1: Be transparent about the financial aid or student loan process.
Many students don’t realize the strain that college tuition can put on a family or their own future finances should they take out a student loan.
While hiding these aspects of the college decision process might be your natural inclination as a parent, being open with your child about the financial implications of their decision serves as a valuable teaching moment about balancing cost and value.
Illustrate the costs of attending college by itemizing expenses such as tuition, room and board, textbooks, etc.
When financial aid or student loans are necessary, walk your kids through the process of gathering information, reviewing interest rates and filling out loan applications. This experience will help them understand the financial considerations when it comes to their choices and will come in handy next time they make a big decision.
< Lesson 2: Demonstrate the power of savings.
Parents today have done a much better job putting away funds for college tuition thanks in part to the rising adoption of 529 plans.
This presents another opportunity to show your children how their money can grow depending on how you save it. A 529 plan may offer higher yields than a 401k, just as a high-interest savings account will grow faster than a checking account.
While this may seem second nature to you, kids across the country are unaware of these savings basics. Are yours?
< Lesson 3: Safely build credit.
Now that your children are 18 or older, it’s more than likely they’ll be approached by a bank to apply for a credit card. While using a credit card from a young age is a great way to build credit, it can be easy for a college freshman to go overboard and get into trouble by swiping too often.
One tactic to help your child build credit while avoiding any disasters is to apply for a credit card, put a few recurring charges on it, such as a Netflix account, and then leave the card at home and out of reach.
This no-risk scenario allows your child to build credit without the temptation to overspend. It also offers the parent the opportunity to explain how credit card debt can be accrued and how to avoid it.
When dropping off your kids at college, don’t just hand over a small pile of cash and wish them good luck. Empower your children with the knowledge to make the best financial decisions as they embark on this next phase of their lives.
By the time they become full-functioning adults, they’ll be equipped with a solid financial foundation for a prosperous future.
Bill Van Sant is senior vice president and managing director at Univest Wealth Management in Souderton.