Financial Discipline From a Distance
While the younger ones are squeezing out as much fun as possible in these last weeks of summer vacation, high school graduates are getting ready for college. A lot goes into this preparation, the majority of which is costing quite a bit of money. It is a precarious time because, if you did not budget and save for this day, you could find your financial discipline going out the window.
But what about your child’s financial discipline once they leave the nest? You want to give them their first taste of independence, including financial, yet at the same time you want to protect them, and yourself, from long-term financial harm.
Here are some things to think about.
The Credit Card
Financial discipline can go completely out the window once your child enters college with credit card in hand. For sure, a credit card is a very convenient way to pay for many of the purchases your college student will need. But with ownership comes considerable responsibility. Can your child handle it? Restrictive credit card rules will help you out somewhat. For instance, to qualify for an unsecured credit card, the applicant must be age 21 or older, with a credit history and a source of income.
So what are your options? As long as your credit is good and you have trust in your child, you can add them as an authorized user to your card. This way you see all of their charges, and maintain some financial control. The worse that can happen is that they go over the balance. This leaves you with a problem, because since they are only an authorized user, the balance is totally your responsibility. However, assuming all goes well, this approach is very beneficial to your young adult, as their record of on-time payments and low balances will be reflected on their credit report.
A second option is that your child obtains a student credit card and you serve as a co-signer. In this case, you are both liable for the debt. If your child fails to make the payments on time, it will negatively impact the credit score of both of you. This approach is wise only if your child is financially literate and you are able to keep a careful eye on his payments and charges. If not, then co-signing on her credit card account would not be a wise decision.
If you are ready for your child to spread his or her own wings and develop their own financial discipline, or simply prefer not to be so involved in their financial life, then a secured credit card is the way to go. A secured credit card requires a deposit and the amount available for charging is equal to this deposit. They are completely responsible for the account, and when they have run out of the security deposit, they can no longer charge the card. This is one of the best ways to help your child develop the financial discipline they will need to be financially successful later in life.
Everyone is App savvy these days, and your young adult is no exception. In fact, anything digital is not only going to pique their interest, but it has the greatest chance of actually being used. To maintain financial discipline with credit spending, many cards have special apps that track charges and alert the user when they are nearing credit limits. The student Discover card, for instance, has an app called Spend Analyzer. This app will send a signal when the user is going over their budgeted limit in certain categories, for instance, meals out. To stay on track with their budget goals, encourage them to download Wally, Venmo or Mint. Digital apps can even automatize transfers to a savings account.
Your college child also needs to begin organizing their finances—how much income to expect, what are the expenses, and so forth. Hopefully, they already learned these skills before heading off to college and are familiar with the concept of budgeting. If not, some financial experts suggest calling the process one of creating a cash-flow paradigm, rather than a budget, which might sound too restrictive. There are many digital applications that assist with this process too. In addition to the ones named above, there is also Quicken, or the old-fashioned way—a simple Excel spreadsheet.
Encourage your college-age child to begin saving as much as possible. If they are earning income on their own, (not the money you send them) they are eligible to open a Roth IRA. This is a great way to start putting aside for the future. Help them establish a savings account at the bank to fund future purchases, such as food, dorm expenses, textbooks, etc. and thereby lessen the amount charged to the credit card. They will learn financial discipline and also build self-esteem from the process of taking control of their finances.