Getting your soon-to-be high school graduate ready to leave the nest for college is a huge family milestone. And while you may have already introduced your child to the basics of financial independence, this will likely mark the first time they’re managing money on their own. So take some time now to go over their finances with them so they can feel in control of their money before they head to campus.
1. Go over their income and expenses
Living within your means is a core part of financial fitness — and that comes down to understanding your income and expenses. Sit down with your child and map out what their monthly expenses will look like, whether that’s gas, groceries or their cell phone bill.
Income is the other side of the coin. Will your child be working in addition to attending classes? Or will you be providing a monthly allowance? There’s no wrong answer. What matters most is setting expectations with your child and having them understand that there is no unlimited well of money to draw from. From there, the two of you can ballpark their monthly income.
2. Teach them to budget
Maybe your kids are one of the rare few who like to track every penny they spend. But chances are good they aren’t, so now that you’ve gone over their income and expenses, talk them through how they’ll keep track of their spending.
One easy way may be to break up their spending into categories. One common budgeting guideline allocates monthly income like this:
- 60 percent for fixed expenses (necessary expenses like their cell phone bill)
- 20 percent for discretionary spending (the fun stuff)
- 20 percent for financial goals (like an emergency fund)
Of course, it might be hard for a college student with limited income to adhere to a budget perfectly – the point is to get them in the habit of knowing a ballpark spending amount they can stick to. Using a budgeting app can help automatically track and even categorize spending for them so they can see exactly where their money is going. They’ll also be able to check their account balance in real time.
3. Encourage them to keep an emergency fund
Having an emergency fund is critical at any age. It’s a pool of cash that can cover costs when the unexpected happens, and the 20 percent allocated to goals in their budget can be used to help fund their emergency savings. While they may not be able to save up to the recommended amount of six months’ worth of expenses (a month may be more realistic), getting them into the habit of keeping a cash cushion will help them with their future financial wellness.
4. Teach them about credit
Your child may soon be bombarded with offers for student credit cards. Having a credit card is a good way for them to start building a credit history, but without a basic understanding of how credit cards work they could be setting themselves up for financial disaster. The risk is that they’ll view credit cards as free money and rack up debt, which will negatively affect their credit over the long term.
Most kids this age won’t have a credit report unless you’ve added them as an authorized user on one of your accounts. (Having one could be a red flag for identity theft.) That means they should have a clean slate. Maintaining a strong credit score can help them secure financing at all stages of their life.
Open the conversation with these core concepts:
- What’s a credit score and why is it important?
- How do I build my credit?
- What are good credit habits?
5. Encourage long-term goals
Big-picture thinking doesn’t always come naturally to teenagers, so you may need to remind them that playing the long game has its perks. Talk about their plans — everything from taking a vacation with friends to buying a new car. Then help them estimate how much they need to save for these goals. Once they have a number in mind, you can break it down into smaller pieces. If they want to achieve their goals in one year, how much do they need to save every month? If money is tight for them, you might consider matching some portion of the amount they save to help them stay motivated.
Want more? Get financial tips, tools, and more with our monthly newsletter.