These days, providing children with the best education possible may come with a hefty price tag but there are some simple lessons parents should teach their budding scholars before they start their university life. Not always do children get financial education in schools until it is mandated by the school systems, which is why they must be trained by their parents or learn about finance in the school of hard knocks which is an unforgiving teacher.
Students need to be aware of their financial responsibilities and more importantly, the adverse consequences poor financial habits can create. Therefore, taking the time to discuss financial matters can help students to initiate sound budgeting measures and prevent them from becoming overcome by debt which will stalk them long after graduation. Financial management skills are extremely valuable later in life and are necessary in order to have a good enjoyable life. Moreover, parents must teach their children how to defer the instant gratification that comes with consumption in order to save enough money to reach their long term financial goals.
Whether entering college or getting ready to graduate, it is key that parents and students keep some essential actions in mind when managing their budget:
Becoming a frugal freshman
Put limits on spending: Make sure students know what they need to survive and determine how much they are allowed to spend on every expense category. Building a budget that works will make it easier to keep spending at a sustainable level, avoiding the need for excessive borrowing.
Major in debt management
Manage debt during and after university: Students really need to understand what debt means for them and set out a plan to pay off their student loans, and any other debt. It is important to consolidate loans in a way that ensures you are paying the lowest interest rate possible. If managed incorrectly, loans can easily become an anchor weighing on future saving and investments. Moreover, accepting a credit card that comes with your new student account can also be a massive mistake; credit cards are not a good idea unless you can pay them off each month before the high interest rates kicks in. Remember that your credit limit is not a target you have to reach, but rather something you need to manage carefully.
Graduating from the University of Mom & Dad
Prepare for life outside of the family financial comfort zone: Mom and Dad have spent years providing comfort, security and financing to their children, often at the expense of their own financial needs. Now that your offspring have completed their education, it is time for them to move out of the family nest, and parents should establish some timelines that will help transition their children towards financial independence. This is an important step not only for young adults but for their parents also. Parents can use this opportunity to reassess their own financial situation and perhaps they can now afford to save more towards retirement or make higher payments on their mortgage.
As students become more financially independent, they should start building on their financial stability and trust their financial behavior. Only recognizing their own behavior, they will be able to best identify a financial advisor they can trust to manage their investments in the future.
The school years may be the best years in life but they can leave students with a burden of debt that persists long after their studies. The lessons above should be taken into account to best learn how to manage your finances during the university years and prepare for the years ahead.
Opinion column by Robert Stammers, CFA, director of Investor Education for CFA Institute