As students head off to college this fall, they’ll learn a lot more than what’s in their textbooks or lecture notes. Living on their own will provide a wealth of real-world lessons, including the importance of keeping to a monthly budget.
A student’s monthly budget may seem small, but college students’ discretionary spending hit $120 billion in 2012, according to a recent survey.1 Students who don’t manage money responsibly can find themselves with credit card debt, a shopping addiction or having to deal with added anxiety in an already stressful environment.
“A big part of managing money is talking about it with your child,” says Tahira Hira, an Iowa State University professor of personal finance and consumer economics and a senior policy advisor to President Obama and President Bush. “Parents have the most important impact on their child’s financial behavior.”
“Parents have the most important impact on their child’s financial behavior.”
Help your student create a sound financial plan to ensure he or she is not living off ramen noodles by March. Here’s how to get started.
Assess your student’s income. College students’ spending money often comes from multiple sources: help from parents, savings, part-time jobs and student loans. As a starting point for budget planning, encourage your student to add up the money they expect to have coming in. “Without that information, it’s difficult to plan your spending,” says Hira. Students who know how much money they are bringing in will have a better idea of how to allocate funds and when to stop spending.
Categorize expenses. Understanding essential and nonessential expenses can help students prioritize and find creative ways to reduce discretionary spending. Some expenses—like textbooks, tuition and rent—are necessary and virtually nonnegotiable once you sign a lease or sign up for a class. Others—like food, clothing and transportation—have more wiggle room. As Hira points out, everyone needs to eat, but food costs vary depending on where you buy and what you choose. Still other expenses—like recreational activities—are optional and easier to control. If your student’s monthly budget is already stretched thin by higher-priority expenses, suggest cutting spending on concerts, sporting events or dinners out, for instance, while still covering the rent and grocery bill.
Check in monthly. Teaching your child to manage money is an ongoing process, not a one-time discussion. Hira suggests having a monthly financial chat about budget planning. Ask how things are going and if he or she is having any trouble paying bills. “The quicker we know what is happening, the sooner we can make any necessary corrections and help our kids get back on their feet,” she says. Mistakes can serve as teachable moments: Instead of paying your child’s credit card bill after he or she goes over budget, spend some time together brainstorming ways to avoid future missteps and perhaps bring in extra money. Having your child take personal responsibility for the bill reinforces this lesson.