Maria Shriver

Having the Budget Talk With Your College-Bound Teen

In the first few days of college life, students begin to realize just how many demands will be placed on their finite resources, from setting up their living space, to purchasing academic supplies, to navigating an ever-present whirl of social options. In the first semester alone, students can find themselves creeping well past their budget.

Here to provide guidance on having the budget conversation with your college-bound teen, is Rachel Cruze, a personal finance author and speaker, and the daughter of Dave Ramsey. Together, father and daughter, recently wrote the New York Times bestseller, “Smart Money, Smart Kids.”

Author and speaker Rachel Cruze Ramsey Personalities

I hear it all the time from parents: “I wish I knew this stuff when I was younger.” But unfortunately, a lot of teenagers still head to college without any idea about how money works. Ten years from now, they’ll more than likely be loaded up with student loans and consumer debt. It’s a scary trend that keeps getting worse. Don’t let that happen to your college kid. Help them understand these issues before they step onto campus.

Here are eight money principles they need to understand before heading off to college:

1. Budget, budget, budget. A budget is simply a plan for your money. And without a plan, it’s hard to win financially. If you haven’t been using a budget, convincing your kids to use one will be difficult at first, but they’ll get the hang of it after a few months. Start by making sure you understand budgeting and use it as part of your financial plan. Then, just walk them through the process—spend all of your money on paper and on purpose before each month begins. Everything should be broken into categories (food, gas, clothing, and the like). You can even include a “fun” category for hanging out with friends. The budget is a huge step in making sure your teenager doesn’t overspend and stays away from debt.

2. The little decisions add up. A lot of college students don’t think about how the little decisions they make during school will affect them financially. Parents need to talk to their kids about the importance of weighing their options for expenses like meal plans and housing and considering the costs of their expenses. And remember that it’s easy to spend $5 here and $10 there on lunches and snacks. That can add up quickly, and before you know it, you’ll rack up thousands of dollars in debt over the course of four years. Live like a college student now, so you aren’t living like a college student after you’ve graduated.

3. The big decisions add up too! The longer your students are in school, the more you (or they) will have to pay. That means changing classes and switching majors aren’t decisions to be taken lightly. If the average tuition is around $9,000 per year, then your teen is spending $4,500 per semester. Add a few classes, switch majors once or twice, and that six-year education can easily cost you $15,000 to $20,000 more than the standard four years at college.

4. Save for emergencies. The one thing you can be sure of about emergencies: They’re coming! It might be a new transmission or a lost textbook, but emergencies are going to happen. You can count on it. That’s why an emergency fund is so important. When your kids head off to college, they need at least $500 in the bank for emergencies only. This will help them deal with emergencies without pulling out a plastic card.

5. Live on less than you make. This is so simple. It’s just common sense. But it’s amazing how many grown adults spend more and take on more debt than they can afford. Their outgo is much more than their income, which means they go further and further into the red every month. That’s no way to live. But that’s what a lot of 18-year-olds are headed for when they sign up for credit cards the moment they head off to college.

6. Avoid debt. College students are graduating with tens of thousands of dollars in debt. Your income is your number-one wealth-building tool. When it’s tied up in monthly payments, it’s hard to get ahead financially. Talk to your kids about being patient and saving up cash for large purchases. If they really want that new TV or a nice spring break trip, then cash is the only way to go. Save, save, save!

7. Don’t worship the credit score. As soon as your kids head off to college, everyone’s telling them, “You need to build your credit!” The credit score is nothing but an “I love debt” score, and you don’t want your teenagers to love debt unless you want them to be broke. And who wants that? But even if they avoid debt, they will always have bills. So make sure they are making those payments on time. Without a credit score, payment history will be very important.

8. Interest rates can make you broke. You know one of the many reasons I don’t recommend using credit cards? Interest rates. According to Bank Rate, the average interest rate for a fixed rate credit card is currently 13%. That means for every $100 you spend, $13 is going to the bank. That interest compounds if you only pay minimum payments, and your son’s $50 video game purchase might cost him hundreds of dollars years from now. You’ll probably see credit card solicitors right at the edge of your campus, since they can’t legally be on campus anymore. Ignore them.

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