One of the most important responsibilities students will have to take on when they go off to college is managing their own finances. While some students may have already begun to take on this type of responsibility, many others have not. This is why we think it is important for students (and their families) to know what they should be considering as students go off to college and become more independent. To find out more, we spoke with Paul Golden, spokesperson for the National Endowment for Financial Education (NEFE).
What are the biggest problems students face when they first begin managing their own money?
NEFE research finds that 7 in 10 college students will engage in risky financial behaviors that could lead to serious financial trouble. These behaviors include not paying bills on time, not making full payments on credit cards, maxing out credit cards, borrowing from credit cards, and taking out payday loans. Students who are more likely to avoid financial problems are those who have had regular discussions with their parents about managing money, have had some form of financial education before leaving the nest, and have had some form of income (from a part-time job) that has given them the experience of managing their own money.
What is the best way for students to set up their banking so that they (and their parents) can track their finances?
The first bank account a college student has should be set up jointly with their parents. This allows a parent to monitor the account and help the children balance their checkbook. If a parent has access to their child’s account, they also may be able to recognize poor spending decisions and help counsel their child to make better choices.
Look for a bank or credit union that offers checking, savings, and preferably, a debit card. Some banks provide special deals such as free debit cards, checks or ATM use to students and young adults. Once your child opens an account, make sure he or she understands how to keep track of their spending and knows about any related banking fees. These include minimum deposit fees, overdraft charges, teller fees and extra charges to use an ATM not owned and operated by their bank.
What are some key things students should know when it comes to managing their own finances?
The earlier students begin working on understanding their finances, the greater the benefits they will experience. The key things young adults and college students need to understand when it comes to personal finance for their age group are:
- Cash management (establishing a budget)
- Spending wisely (understanding the difference between needs vs. wants)
- Having a reserve for unexpected expenses
- Using credit responsibly
- Using student loans only for education-related expenses
Are credit cards a smart idea for students?
A credit card can be an effective tool to managing money, but without a solid understanding of how it works, a student quickly can get into financial trouble. There are a few basic things a student needs to understand about credit before opening an account, including how interest rates impact the ultimate price you pay for goods or services; what credit limits are and what fees are imposed if you overspend; the importance of on-time payments; negative impact on credit score if payments are late; and what kinds of purchases are appropriate for credit cards.
Alternative options for parents who want their children to have access to credit in case of an emergency are a prepaid credit card, which works much like a debit card; a bank-secured credit card, with the card’s credit limit generally equal to the amount of money in the child’s savings account; or adding the child to the parent’s account.
What are some of the biggest problems students experience upon their graduation when it comes to managing their own money?
Some of the problems recent graduates experience in terms of managing their money are the challenges many Americans face on a day-to-day basis. These include not having a budget or a savings plan, not saving for short- and long-term goals, understanding the difference between needs and wants, exercising restraint when it comes to making impulse purchases, using credit responsibly, and not having a reserve account. Unexpected expenses happen to everyone. An emergency savings account provides peace of mind, but also lessens dependency on credit when unforeseen circumstances occur.
What is your advice to students (and their families) looking to getting ready for college and getting started on managing their own finances?
NEFE research has proven that parents have the most influence over how children will learn to manage their money, more so than taking a course in finance and having their own income to manage. Therefore, teaching kids about money must start in the home. It’s up to parents to recognize that they are teaching their kids a life skill that they will use every day throughout their lifetimes.
- Teach financial lessons early and often
- Role model by setting a positive example
- Teach kids how to set a budget
- Make sure children understand the difference between needs vs. wants
- Teach children the time value of money and the importance of saving
Young adults should seek out information outside the home as well:
- Talk to people at school
- Financial aid office
- Student life office
- Tap into other campus resources
More About NEFE
The National Endowment for Financial Education provides a free resource to college students and their parents that covers the basics on starting to manage money. 40 Money Management Tips Every College Student Should Know can be found online at www.smartaboutmoney.org.