Over the next few weeks, college-bound high school seniors will be walking the stage dressed in cap and gown, receive their diplomas, and begin preparing for their first year of college.
For many of them, this will be the first time they will live independently – do their own laundry, hopefully keep their room in order (yeah, right), and manage their own finances.
While the first two aren’t make-it-or-break-it life skills, knowing how to manage money and stay out of debt can alter the future of any adult – especially those just starting out.
With about 70% of college students accumulating $28,400 in student loans, today the stakes are even higher for college students to manage their money well. The moment these students graduate from school they will need to determine how to pay off these loans while living within a budget they can afford.
The one thing parents can do to set teens up for success
So how can parents ensure their teens are ready to handle the responsibility of managing their own money?
According to the 2015 Money Matters on Campus report, that surveyed 42,000 college students, other than taking a financial literacy class in high school, the one experience that proved to make teenagers feel most prepared to manage money was having their own checking account.
As the report says: “Respondents with a checking account, especially an individual account…were markedly more prepared than those who [didn’t have one].…experience with managing a bank account is a key component of developing independent financial capability.”
In other words, having the experience of managing the deposits and withdrawals of a bank account BEFORE college – and before students’ financial lives become even more complex – means one more thing college-bound teens can feel confident about when they head off to school.
But don’t do this
But what about credit cards? Shouldn’t teens also have experience with credit before leaving for school?
According to the Money Matters survey: “Feeling prepared to manage money in college was not related to a student’s experience with credit cards – it actually decreased as they got cards earlier in life.”
While the report doesn’t say why this is the case, managing credit can in some ways be easier (in a bad way) than managing a bank account – credit cards permit delaying payments until later whereas a bank account is a zero-sum game – either you have enough cash in your bank account or you don’t. Hard choices have to be made when there is little money left in a bank account, while those same decisions rarely exist with access to thousands of dollars in credit.
Don’t forget to have the talk
Beyond giving your teen a bank account, don’t forget to also talk to your teen about how to manage finances.
According to a survey by H&R Block, 75% of teens say their parents are their most important source of financial information. And kids whose parents frequently discuss money with them reported feeling more knowledgeable about personal finance, than kids whose parents don’t discuss money with them.
These financial talks can range anywhere from how to write a check to the impact student loans can have on a graduate’s financial future. It’s also a good idea to explain how credit cards work and the real cost of an item if the card isn’t paid off at the end of each month. Even if your teen won’t have a credit card in college, now is the time to educate them.
The value of a good education
While going to college is certainly a major accomplishment, both for the student and the parents who got them there, being well-educated in basic personal finance can be equally impactful on a student’s future. If a student is unable to manage money, it really doesn’t matter how high-paying a job they land after college.
So while you prepare your teen for college, make sure they are also educated in personal finance – have them open a bank account, hopefully before their senior year – and find the time to educate them about the ins and outs of basic personal finance.