By Andrew Schwartz, CPA, Founder of the MDTAXES Network
Last month, my wife and I dropped off our older child at college to start his freshman year. He is eager to spend the next four years taking classes in a variety of interesting subjects while working towards his degree.
A lot of what college kids learn, however, is learned outside the classroom. My wife (who is a Certified Financial Planner) and I feel we already planted the seeds for a few practical personal finance lessons as part of our son’s preparation for his freshman year.
Sticking to a budget is helpful for businesses as well as for households. While some people put together very detailed budgets each year, my son opted for a much simpler alternative to track whether he will end up sticking to his budget.
Earlier this summer, my son opened his own checking account along with a companion savings account, and then deposited all of his paychecks from his summer job, plus any graduation gifts he received, into his new savings account. He feels he earned enough during the summer to have built a sufficient stash in his savings account to cover his books and spending money for the entire freshman year.
Here is the step that will help him learn about budgeting basics. In order to make this pool of money last through both semesters, he only transferred enough money from his savings account into his checking account to cover one semester’s projected spending. Doing so lets him easily monitor his spending as compared to his budget.
If there is any money left over in his checking account at the end of the first semester, then he successfully met his budget. Alternatively, if he ends up dipping into his savings before Semester One ends, he knows he’ll need to increase his budget for the second semester, which means he’ll probably need to get a job over winter break and/or work on campus when he returns to school in January in order to meet his second semester spending needs.
Begin to Establish a Credit History
My son is also taking this opportunity to begin to establish his own credit history. At the same time that he opened his companion checking and savings account, he also applied for a low-limit credit card connected to these accounts. I believe the limit for his credit card is just $800.
Each month, he plans to make a few purchases using his credit card. To make sure he won’t miss making the monthly credit card payment (which would end up hurting his credit score), he already set up for the full balance of the credit card to be “autopaid” out of his checking account prior to the card’s due date.
Establishing a consistent history of utilizing credit and then paying off the balance due in a timely fashion is a great way to establish a credit history and build up one’s credit rating. Graduating with 48 months of consistently good credit history will be very valuable to someone entering the work force, looking to purchase or lease a vehicle, hoping to rent an apartment, or doing anything else that would require someone to pull a credit report.
Two Great Lessons:
Learning how to budget and taking steps to establish and improve one’s credit are two practical personal finance lessons that my son won’t be taught in the 40 or so college classes he’ll be taking over the next four years.
Instead, he has already begun to learn these two useful lessons as part of his college experience before even stepping foot into his first undergrad class.