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 Leaving the Nest: What Your Young Adults Need to Know About Money by Carrie Schwab Pomerantz, Chief Strategist, Consumer Education, Charles Schwab & Co., Inc. and President, Charles Schwab Foundation April 12, 2007 Dear Carrie, My daughter is a senior in high school and will be leaving the state for college next September. She already has a checking account and an ATM/debit card. Is there anything else in the financial realm she's likely to need? —A Reader Dear Reader, If your daughter has a checking account and an ATM/debit card, she's got the basic tools for managing her money when she heads off to college. But it's even more important that she knows how to use those tools effectively. You need to give her some knowledge on the topic of personal finance, particularly budgeting, and the best way to do that is through some hands-on experience now, while she's still at home, along with a well-articulated strategy for next year. You'll boost her financial confidence for what is for most young people a stressful but exciting time: their first taste of independence. Perhaps more important, you'll help her build a financial foundation for the rest of her life. The college "allowance" I'll presume you're planning on providing some sort of allowance for your daughter’s personal needs and spending while she's at school. (Of course, some kids work part-time during college, which I think is a great idea. As long as a job doesn't interfere with academics, I believe it can be a hugely positive experience as well as an excellent way for a student to earn some money for expenses. And for many kids, the responsibility of having a job forces them to be more careful with their time.) You'll want that allowance to be realistic, and you should want her to take the responsibility for managing it. Let's look at the idea of "realistic" first. Start by making a budget, but recognize that you almost certainly will need to modify it once she's been at school for a month or two and she has some experience with day-to-day college life. What is she going to need money for? The obvious things: textbooks and school supplies, clothes, local transportation, food (unless she'll be on a meal plan), and spending money for extracurricular activities and socializing. Also think about the costs of transportation for vacations and holidays. I'd start by having her create an estimate of a reasonable budget (have her do some research, by talking to friends who've already gone off to school). Then you can adjust that estimate now, if you think it's way out of line, or later, after she's matriculated. Next step: Figure out a reasonable way to dole out the allowance so that your daughter is in control of the money (that's the key to fostering her sense of financial independence). If she's very responsible and prudent about spending, give her the whole sum at the start of each semester, and let her make her own choices. Or if you think that she could use more experience with the realities of living on a budget, you could give her the money monthly. (You can set up an automatic transfer with your bank and hers to make this relatively painless.) Make it clear that she's expected to pay for the items covered in the budget with this money but also let her know that she should come to you for extraordinary needs (perhaps her computer bites the dust or she encounters some unexpected but reasonable expenses). Realize, too, that even if you can afford to give your daughter whatever she needed or wanted, it's far better for her to learn to live within a budget. Trust me, she'll grasp the realities of money management very quickly if she runs out of money before the next installment is due. And she'll learn about making choices that reflect her own realities. Maybe she wants to spend $3.50 every morning for a skinny mocha latte, but maybe she'd rather make black coffee in her dorm and buy a new dress. Another suggestion is to give your daughter some experience of living on a budget now, while she's still in high school. Her budget will of course be different, but a monthly allowance, for example, requires a little more planning on her part than a weekly one, especially if she's expected to use it to pay for a range of things. And if you do this now, make sure she understands that it's practice for next year. The realities of credit and debit cards Credit cards are essentials in today's world, providing convenient access to the world of electronic payments, which is obviously necessary for online purchases and things like airlines tickets. Since your daughter has an ATM/debit card, she may not need a traditional credit card, but she'll almost certainly be offered one when she gets to campus (and some people worry about the potential liabilities of debit cards, which I discuss below). So one of the things for you to do now is to introduce your daughter to the realities and potential dangers of credit cards. Too many young people think of credit cards as cash substitutes, but it's a well-known phenomenon that people loosen up their spending habits when they use credit instead of cash. Call it the "I'll just charge it" mentality. But the problem is that they have to pay for it later, and if they don't pay on time, they'll face high interest costs and exorbitant late fees. They also run the risk of damaging their credit rating. It’s also important to understand a bit about the way credit cards interest rates are established. In a nutshell, a bank will typically evaluate a person’s credit worthiness, and charge accordingly. When a person is young and hasn’t established a credit history, and has negligible income, he or she is generally considered a higher risk – and is likely to be assigned a higher interest rate. So as a parent, how can you help your teen get the best possible rate? Here are just a few suggestions:
I should also point out that debit cards carry more potential risk than credit cards if they are lost or stolen and used fraudulently. Federal law requires credit card companies to limit liability for fraudulent use to $50 (and some cards provide complete protection against fraud). Debit cards, on the other hand, require you to notify the financial institution within two days to cap your liability at $50. If you wait longer, you may be liable for up to $500. Probably worse, since debit card purchases are deducted from the associated checking account, your daughter could experience a serious cash flow problem if her card is used illegally. If she sticks with the debit card, tell her to check her account often for fraudulent activity (easy to do online!). Some banks can also put your photo on your card for extra security. Convince her to start saving I feel very strongly about teaching children to save – whether the money comes from an allowance, working, or gifts. Of course saving may not be realistic for most college students, but it's worth reminding your daughter of the importance of having an emergency fund as well the value of saving for longer-term goals. Even if she puts away a small amount, it's a habit well worth cultivating, so much so that you might consider creating an incentive. You could, for example, increase her allowance if she agrees to make a regular contribution to a savings or an existing investment account. And if your daughter does have a job, at school or during vacations, she should be eligible to open an IRA. If she can afford to make an IRA contribution (or if you can afford to fund that contribution for her), she'll be starting very young on the ultimate financial challenge: securing a comfortable retirement. Having the IRA (or even small investment account of her own) will help her learn the basics of investing and give her that much more preparation for financial independence. I know that launching your child into the world can be a tough and emotional time. But you'll be helping her considerably by giving her a degree of freedom and the knowledge and experience to use that freedom. She's bound to make mistakes with money—we all have—but she's also bound to learn from them. That's an education in and of itself. Important Disclosures The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of financial strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction and investment strategy for his or her own particular situation. Data contained here is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. (0407-5895) Return to Top |
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