THE COLLEGE 'ALLOWANCE'
I have always felt that an allowance is an ideal way for children to learn the basics of budgeting, spending and saving. Many parents help provide spending money for their kids at college. But how much is enough?
Unfortunately, colleges don't seem to provide much guidance. So before we said our goodbyes, the three of us settled on a modest monthly allowance intended to cover all of Ross's extracurricular activities; we'll be billed directly for tuition, books, housing and his meal plan. The money is automatically deposited into Ross's checking account at the first of each month, and it's his to use however he feels is appropriate. We also agreed, because it's hard to estimate the right amount, to renegotiate his allowance after a month or two.
The challenge for Ross is to learn to ration his spending money so that he doesn't find himself short of cash at the end of the month. Of course, he can come to us for an extraordinary expense, but my hope is he'll learn to live within his budget; this is excellent practice for the universal challenge of living within one's means.
THE CREDIT CARD CONUNDRUM
We had already given Ross a credit card with a fairly low spending limit when he was a junior in high school - mostly so that he could get practice using it while he was still living at home. Back then we had a long talk about the wise use of a credit card, and now he just needed a quick review. For those of you who are just taking the plunge, keep these ideas in mind:
- It's usually best to get the card from your local financial services provider; the terms are typically much better than the mass offers extended by card companies to students on campus.
- Credit cards are somewhat safer than debit cards. The liability for a debit card is up to $500 unless the loss or theft is reported within two days, so that could trigger a real cash flow crisis. In comparison, Federal law limits credit card liability to $50 regardless of when the loss is reported, and many cards will cover all liability.
- Teach your kid that the card is not a substitute for cash but a tool to be used in emergencies and for online or substantial purchases.
- Make sure your kids understand the necessity of paying off the balance in full and on time every month; compounding high-interest credit card debt can get very expensive quickly, and late fees and penalties will only add to the total. One shocking statistic from the Federal Reserve's 2004 Survey of Consumer Finance: Almost 48 percent of households headed by someone under age 35 has credit card debt.
Part-time jobs during the school year are an essential element of the college experience for many kids. The extra money is valuable, of course, but according to the staff at Ross's college, there are other benefits as well. For example, most kids with jobs learn how to manage their time more effectively. They'll certainly learn about the work ethic and the importance of personal responsibility. And an on-campus job can also help your kid feel more connected to campus life. To my mind as long as the work doesn't interfere with the academics, work is good thing for most college students.
Obviously, a job can ease the financial burden of higher education, but if your child can afford it, or if you can afford to help them, also think about encouraging them to use part of their paycheck to open a Roth IRA. Even a few hundred dollars has the potential to become a substantial sum if invested for growth in a tax-deferred vehicle. Roth IRA contributions are not tax-deductible, but they grow tax-free, and withdrawals are not taxed as long as the owner is aged 59 or older. They'll be learning a valuable lesson about the long term and getting experience with the financial markets.
SAVING IN COLLEGE
Ross has had a savings account since he was quite young (it's been his home for birthday checks, holiday checks, etc); however, now that he is 18, the money is his to spend or save. I did tell him, though, that I would like him to continue to save as much as he can - either to continue building his "rainy day" fund or to meet a particular goal. If Ross has money left over when he graduates, that could be a nest egg that will help him when he heads into the work force.
It's now a couple of weeks into September and Ross seems to be adapting quickly to the challenges of college life, quicker than I'm adapting to life at home without him. In class, he's learning about subjects that will help him find his place in the world. As he makes new friends and navigates through college life, he's learning about himself. And as I fight my inclination to pick up the phone, it's my hope that Ross is also learning, at least a little, about the financial realities of independent adult life.
Stay tuned.
Carrie Schwab Pomerantz is chief strategist, Consumer Education, Charles Schwab & Co. Inc. You can e-mail Carrie at askcarrie@schwab.com.
