“I don’t know how to cut off my college aged child from financial support. They are spending way more than they make.”
This is a problem that I’m hearing quite often in my work with clients. The realities of the last 30 years have created tremendous amounts of wealth for the baby boomer generation. That wealth has been shared with their families and their children have become accustomed to a certain quality of life. When children leave the nest and head off to college it becomes common practice to give the young adult a “family credit card” for college expenses and food, etc. Unfortunately, this often extends to non-necessities as well. A credit card can also get used for online purchases, something the younger generation does quite regularly. The behavior of the young adult is an extension of their life at home – mom and dad covered all expenses and if they don’t correct that behavior, it will extend into a spiral of challenges. Credit cards are all too easy to obtain and college students have been known to build up piles of debt, from student loans to credit cards, auto loans, and more.
As a CERTIFIED FINANCIAL PLANNER™ I have had many conversations with clients and discussed solutions ranging from cutting them off completely, to simply weathering the storm until school is out and hoping for a different post college situation. I truly feel that one of the greatest gifts that a parent can give their child is a financial education in budgeting. Consider this following simple six step action plan to building financial skills with your child and relieving yourself of a major potential retirement obstacle in the future.
1. Cut off the credit cards – Buying on credit is a nasty habit. Sure interest rates are low today, but those rates will eventually increase. Oftentimes buyers use credit because they don’t have the money to but it now – this is a very slippery slope because there is always something else to buy. While I would love to suggest moving to a cash only method, it’s not very practical in today’s world. I suggest you open a joint checking account at a bank and issue a check card / debit card. I would recommend that you have your child select the bank. Please note the account should be a joint checking account – if you are going to be supporting, you certainly should know where the money is going. (see #5 below)
2. Create a Statement of Net Worth with your child – This is a very basic task for most young adults. It will probably look something like this:
- Checking - $200
- Savings - $300
- 529 Plan - $15,000
- Savings Bonds - $400 (my grandmother always gave me savings bonds for my birthday growing up, and I’m sure others have a grandmother like mine)
- Brokerage Account - $650 (equal to one share of apple stock)
- Total Assets – $16,500
- Credit Card - $1,200
- Personal Loans - $300
- Total Liabilities - $1,500
c. Net Worth - $15,000 (Total Assets minus Total Liabilities)
Review this Statement annually and discuss the reasons for the changes.
3. Create an annual budget with monthly details – this is a very important task that you can start with the following main categories:
- Technology (internet, cell phone, Xbox subscription, Netflix, etc.)
- Auto Loan
- Car Insurance
- Entertainment (dining out, drinks, movies, concerts, trips, golf, etc.)
4. Come up with a plan to fund expenses – This may include some portion of contributions from mom and dad, some student loans, a roommate rental contribution, etc. Expenses may also be reduced by making lifestyle changes like riding a bike to school, etc.. Young adults can be very creative, let them come up with budget solutions – you’d be surprised how quickly they are to switch from a $120/ month cell phone service to a $50/ month plan.
5. Review the actual budget with your child every month – This is the most important step! It should take less than 10 minutes of time per month, but it will be a timeless lesson on responsibility, accountability, and stewardship. Plan this monthly meeting on a specific time every month so that you can ensure that you have it. I firmly believe that this exercise of reviewing expenses will strengthen your relationship with your child. You will have an insight into the things that they find important. Be encouraging, I would strongly suggest that you include the first two categories – even if it is only $1 per month. It is a mindset and habit. Saving $1 seems ridiculous, so it quickly grows to $5, $10, and $100. Set goals with your children.
6. After the budget review, discuss budget revisions or actions to change spending habits - All too often, people believe that they will be able to earn more money tomorrow to pay off the debts that they are accruing today. That is not a good solution. My first hand discussions with recent college graduates today lead me to believe that starting salaries are no better today than they were ten years ago, while the amount of personal debts have increased. Frozen salaries combined with a tough economy should encourage prudent spending behavior as opposed to borrowing.
This six step plan will help you understand your own budget as you help your children through college. More importantly, it will teach your children the importance of financial independence. Teach your kids to live like nobody else today, so they can live like nobody else tomorrow.
Rodd R. Miller, CFP® is the Founder and President of Miller Wealth Management in Carlsbad, CA. He can be reached at 855.760.4800 or firstname.lastname@example.org.
Securities offered through LPL Financial, member FINRA/SIPC.