If you’re the parent of a high schooler, helping your child decide where to go to college or even where to look is not just a matter of choosing a school that’s the best social and academic fit. It’s also a money matter.
In many cases, you’ll be the one helping to foot the tuition bill and guiding Junior toward taking out student loans. Yet, once he’s off to college and living independently, he’ll be making his own spending choices. He’ll also soon learn that loans are not free money and paying them back could put a real dent in his lifestyle for years to come. This is why it’s important to start teaching your child about the principles of saving and budgeting before they get to college. Here are three top money matters that will help your college-bound child manage their finances while in school and long after graduation:
1. Carefully weigh the pros and cons of that expensive college.
That exclusive private school may be Junior’s dream college but it is also likely more expensive than a state school. This could mean the difference between hefty student loans and graduating debt-free.
Although talking to Junior about college costs can be emotionally-charged, it’s important that he understand that the expensive school could lead to seemingly endless loan payments for years after graduation. For this reason, it’s imperative that Junior weighs all of his college options and considers schools that might offer him scholarships and grants, as well as employment opportunities. He may thank you for it later when he’s not saddled with student loans and stuck sleeping in your basement because he can’t afford an apartment.
2. Learn budgeting basics now
Going off to college may be a big wake-up call to Junior as he will be paying his own bills for the first time and won’t be able to rely on you to fork over last-minute movie money. Generally speaking, the college years are the time when you will open a checking account for Junior and he’ll have to learn to manage his own money and stick to a budget. But why not open this account prior to sending him off to college? This way he can begin learning how to balance his checkbook and live within a budget right now. Kids are tech-savvy and online banking makes it simple to keep track of spending. In fact, it’s a pretty safe bet that Junior will be able to maneuver around the online banking site and figure out how to keep tabs on his own spending without your help. This will better prepare him for real life financial management decisions.
3. Start saving early and plan for the future
It may seem a bit crazy to start discussing the importance of saving for retirement with your kids before they go off to college, but there’s no time like the present to explain the advantages of socking away money now for your future. In fact, starting early and contributing as much as you can into tax-advantaged accounts is key to security in your retirement years, according to Fidelity Investments. For some kids, saving for retirement can begin once they graduate and get jobs. Still other teenagers who have summer and part-time jobs can begin socking away money for retirement right now. A Roth IRA is a great option if Junior already has a job. Funded with after-tax dollars, contributions of up to $5,500 in 2016 grow tax-free.
Regardless of whether a retirement fund is opened before, during or after college, Junior will be ahead of the game by starting to sock away money early — thanks to the magic of compounding interest, according to Charles Schwab.
This sure beats trying to play catch-up when he has his own family to support. Just take a look: If Junior starts investing $1,200 a year at a 6% annual rate of return at age 40, by the time he’s 65 - 25 years later - he’ll have $69,787. But, if he invests that same $1,200 annually at the same interest rate starting at age 25 for 49 years, he’ll have $347,203 when he’s 67, according to Charles Schwab. Now that’s a math lesson worth teaching.
Image: Alex Jones