Talking to your adult kids about money is never easy. As a college student you have a lot of choices with both your time and money. Given students typically have more time than money, helping them make the most of their financial resources could be a valuable investment in their future.
Habits around money are often created at an early age. This takes place as kids absorb how their parents handle money and then by trial and error and they earn income from their first job. A weekly allowance may allow young children to get used to handling cash. Not necessarily for chores, but simply to get comfortable with making decisions with what they have. Overtime, these lessons on spending (both good and bad) tend to stick and influence how money is handled as adults.
Fast forward to today, and your student may likely have a summer job or paid internship so they may have cash to spend this fall. These dollars may go to books, subscription services, food delivery, or other priorities they deem important (beer & pizza). Instead of talking at your children about spending in terms of budgets and getting the expected eye roll, what if you could communicate the value of managing cash in a simpler example? Does a framework exist to help them develop better spending habits?
I like to compare cash flow and spending to the plumbing system inside a home. There are pipes running all over your house to move the right water, hot or cold, to the right faucet, shower, or appliance on demand. Spending and saving money as a young adult (or grown up) works the same way. Your job allows for a paycheck to be automatically deposited into your bank account, much like water flowing into your home. From there, water may be directed to the right room in your home based on need. Having your college student own various bank accounts with a specific purpose may allow them to direct cash proactively. This concept of a plumbing system is easy to relate to and may lead to a more engaging conversation on how much water/money is necessary to cover expenses. Beyond current expenses, having some monies in a separate account for the Spring Break trip next March will serve them well.
There are numerous apps students may utilize to handle their cash or send money to friends when going out. Helping your kids establish bank accounts with one linked to a debit card may allow for better spending when away from home. When your student makes purchases with a debit card, it’s only possible to spend what’s in the bank account. Unlike a credit card with a high available limit, debit cards require a raised awareness of how much money you have at any given time. This focuses attention on what and when a purchase may be made. Influencing spending overtime creates better habits when compared to simply charging a credit card and forgetting what has been purchased.
The reality of credit card spending as a young adult is problematic for several reasons. First, your student likely is not receiving or paying the bill, you are. It’s difficult to have a conversation on what’s being spent where when your son or daughter can’t see the results of their spending. Second, credit card bills typically arrive via email and require you to react in paying them off each month. Yikes, how did all that spending accumulate? A college student utilizing a debit card may have greater success in spending down their bank account balance and avoid paying a large bill at the end of the month. Finally, just because you have a high spending limit on a credit card doesn’t mean you need to max it out. Credit card companies are smart and attempt to influence your behavior and spending with rewards and points. This can be a slippery slope as getting into debt is much easier then climbing your way out.
Taking this a step further and ensuring your son or daughter has the online banking app on their phone will allow them to know exactly what they have available to spend. This may influence and nudge them into making better spending decisions. When the SOS text for more money arrives, don’t be surprised. Having your bank account at the same institution may allow you to send some resources along if you are so inclined. Mistakes will happen, it’s not about perfection as much as it is about testing and adopting a repeatable system. This may allow young adults to create positive spending habits that they may hold onto long after college graduation.
Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Flowerstone Financial are not affiliated.