The college years are a great time to teach kids how to be responsible for - and about - their money. For some students, this is when they begin to figure out what things cost and how much money they need to live. They also can learn valuable lessons in budgeting, cost cutting, debt management and protecting themselves against identity theft. If all goes well, your children should graduate with many of the tools needed to manage resources responsibly when out on their own.
Here are some ideas I believe should help to get you started:
What They Need: Equipping a college dorm room can be a big job; meeting the banking needs of the average college student is not. Students need a checking account with a debit card. Be sure your children are not going to incur any ATM fees. If the college is in a small town, that may mean opening a local account. In a big city, be sure the bank has a branch near campus. Whatever the arrangement, your children should know which ATM machines to use. If you have an account on which ATM fees are waived, you may be able to set up a linked account for your children. If the account is with a different bank, you can generally still link your children's accounts to yours so you can transfer money electronically.
Much has been written about whether or not to have a credit card at college. The House Financial Services Committee on Financial Institutions and Consumer Credit held hearings last summer to address the aggressive marketing of credit cards to students. A survey published by student-loan provider Nellie Mae in 2005 (the most recent data available) showed that the average outstanding balance on undergraduate credit cards was $2,169. The same study reported that 56 percent of students carry four or more cards by the time they graduate. Since many students leave school with student loans to pay off, parents should think carefully about the possibility that arming a student with a credit card could add to the debt load in the long term.
It's best to start with common sense: Unless a student is earning income, paying a monthly credit card bill is an impossibility. Remind your children that they don't get a good credit rating just by having a credit card - they have to pay the bills on time. At the very least, consider waiting a year until your student has built a good track record of managing cash and learning to put money aside in savings before signing up for a credit card.
What They Spend: Many colleges have estimates of annual expenses on their websites. These tend to fall in the $1,500 to $2,000 range and may or may not be useful depending on how typical your children's spending habits are, so be prepared to do a little tinkering to get to the right number. The goal is to arrive at a fixed monthly amount that you will put in their accounts, leaving your children the responsibility of managing finances so they do not run out of money before the end of the month.
Doing some research to arrive at a realistic estimate of expenses is worthwhile. But remember that the decision ultimately hinges on your own finances: What monthly amount is both appropriate and affordable for you? If you don't start here, you're off on the wrong foot. You are trying to teach your children the logic of financial planning. In the real world, we all have to start with a number - usually a salary - and work back from that to figure out how much we can spend on rent, food and other necessities.
Once you have your number, encourage your children to draft a personal budget. Make sure they understand what is already paid for (how many of their meals are covered, for example). For the first few months, get them to keep track of the money they spend on going out with friends, things for their room, clothing and so on. As they get some experience with the process, give them more money so that they can take more responsibility for their finances - let them begin to pay the monthly bills such as those for student loans, rent, utilities, meal plans and even travel expenses. By the time they graduate, you want them to have a sense of what the key components of living expenses really are.
Cost Control: Encourage your children to take advantage of all the ways to save money at college. Student discounts are available on everything from travel to clothing. There is usually a place on campus to buy and resell used books. Be sure your children understand all the costs associated with having a car if this is something they are planning on.
Identity Theft: Kids spend a great deal of time communicating via the Web and it may be hard for them to anticipate how this free flow of information could be detrimental. Educate them about what identity theft is and explain how they can protect themselves against it.
Conversations about finance with teenagers are not always easy. Learning how much things cost can be quite an eye-opener - many kids just haven't thought much about money matters. But investing time in getting them on the right track will pay significant dividends down the road. You never know: One day they may even thank you for the lessons learned.
• William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of Morgan Stanley Smith Barney LLC. He can be reached at William.a.creekbaum@mssb.com or 689-8704.