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Families across the country are prepping to send their children off to their freshmen year of college.
What should be included in a family’s financial to-dos for their college-bound kids?
As you prepare your kid for collegiate life, there are a number of areas to cover, so pace yourself!
Even if your Gen-Zer is more comfortable with peer-to-peer money transfers, like Venmo, they still need to establish a banking relationship. Many parents link accounts to keep an eye on what’s going on with their kids’ finances and to transfer money to their account seamlessly. You should also take this opportunity to provide your kid with a lesson in compound interest; insidious fees, like minimum balance and overdraft protection; and electronic bill paying.
Track the Money
Every student should begin tracking how much money they’re making and spending, to address all aspects of their financial life. This is a foundational habit that is more easily maintained if it begins now.
Discuss Credit Cards
This important part of a college student’s life can set the tone for their financial success.
You might be inclined to choose a debit card to protect against over-spending or debt problems, but notably, debit cards do not help establish that all-important credit history, which will become the backbone of your child’s future ability to borrow money at preferred rates.
That said, stress with your college-bound kid how credit card debt can pile up and have an effect on your financial future. To illustrate the point, show them how long it could take to repay a $1,000 credit card debt by only making the minimum monthly payments. There are plenty of credit card repayment calculators out there.
After that foray, the next step is to determine what kind of card you will choose.
You can add a child as an authorized user on your own account, which allows them to spend and could help build their credit profile, with the help of your good credit. While an authorized user arrangement allows you to keep tabs on activity, if your child goes wild, the primary account holder (that’s YOU!) will be on the hook for the charges.
Alternatively, you may choose a secured credit card, which requires a refundable cash deposit, usually equal to or less than the card’s credit limit. The big complaint about secured cards is the low credit limit, but with consistent on-time payments issuers may offer you an unsecured credit card with a higher limit.
Remember the first time you saw FICA and wondered, “Who’s FICA?” Students often work throughout the school year, and may not be looking closely at their paystub. Parents can help their kids review all aspects of a paystub so they know what comes out of their hourly wage.
Explain the difference between gross pay (before taxes are taken out) and net pay (the amount you take home) and discuss how employers withhold all sorts of taxes, including: federal, state and local taxes and payroll or FICA, which includes Social Security and Medicare, programs that help sick and elderly Americans.
If you have trouble going through the paycheck with your youngster, there are online resources that help you breakdown the different aspects of a paystub.
It’s never too early to develop a savings habit.
Have your kid establish an automatic savings program so that at least 10 percent of their earnings is directed into a savings account. I would also recommend college kids open a Roth IRA account to instill the concept of retirement savings.
Explain that a Roth IRA allows the money earned to grow tax-free for life. Some parents even contribute to their kid’s IRA. You can experiment with different amounts of savings and interest rates by using a compound interest calculator at investor.gov.