This summer, many incoming college freshmen are excitedly packing their bags — as parents nervously hand over their credit cards. If you have a child heading off to college soon, we have three important lessons you can teach your student about handling money smartly when he or she arrives.
Another place where smart money management matters is on the road, so we’re also sharing five tips to help you keep your money safe when you travel.
And remember — CommerceBank.com is always standing by to help you with your financial questions and banking needs.
Money 101: Financial Basics for College Students
For some students, heading off to college marks the first time they have been required to deal with financial responsibilities on their own. Is your student ready? Read on for three basic lessons you can impart to help him or her prepare for the financial real world.
Lesson #1: Create a budget and stick to it.
A daily coffee run before class, an impromptu night out, tickets to the big concert … these things may seem harmless individually, but over time they can lead to habitual over-spending.
A detailed budget can help students live within their means. Knowing exactly how much money they need to set aside for necessities can provide an accurate picture of what they have left at their disposal. It can also help them allocate the savings they bring with them to college, so they can make those funds last as long as possible.
Students can create their monthly budget in three easy steps:
1. Add up income.
Include work wages, parental contribution, reserves from savings and scholarship or financial aid funds (after tuition and book expenses).
2. Add up fixed expenses.
from rent and utilities to car payments and insurance.
3. Deduct total fixed expenses from total income.
This will determine what’s available for variable expenses. These include things like groceries, shopping, entertainment and travel. Advise students to set a spending limit for each category, with the understanding that if the limit is exceeded in one category, spending will need to be reduced in another.
Lesson #2: Use credit wisely.
Whether they go over budget or become tempted by a big-ticket purchase, students may see credit cards as an easy solution. And while credit cards can play an important role in establishing credit history, they can also cause long-lasting damage to credit scores if used carelessly.
Help students use credit wisely by encouraging them to:
• Pay bills on time.
Late fees can be expensive and missed payments can tarnish a credit report for years.
• Pay bills in full.
Paying off the balance each month can help avoid interest charges and establish good credit.
• Keep debt to a minimum.
Excessive debt can hinder loan applications. Students should limit themselves to one credit card. And if paying in full isn’t possible, they should strive to keep the balance below 20 percent of the credit limit.1
Lesson #3: Choose the right banking products and services.
Chances are students have never had to select their own checking account or credit card before. They may not realize that differences among various banking products — both features and pricing — can potentially affect their finances.
The right fit may depend on a student’s individual needs, but in general, college students should look for the following qualities in their accounts:
Many banks offer accounts designed just for students. Be sure to ask about any additional fees associated with specific behaviors, such as overdrafts, paper transactions or ATM usage.
While many savings accounts do not have a minimum balance, they often have a maximum number of withdrawals and/or an inactivity fee if the account goes untouched for a long period of time. Setting aside just $5 or $10 a week can help avoid an inactivity fee and establish smart saving habits.
• Credit cards.
Things to consider when choosing a credit card include the credit limit (how much can be spent on the card), potential annual fees, the annual percentage rate (APR – interest rate charged on purchases), fees (annual, late-payment, over-limit, cash-advance) and incentives (cash back, reward points, frequent flier miles). Be sure your student understands the types of fees that may be charged.
One Less Worry
Undoubtedly you have a lot on your mind as you prepare to send your child off to college. The knowledge that he or she is equipped to handle the day-to-day financial responsibilities that await them may help you rest a little easier at night.