Being aware of money
Money is a subject that is difficult for many families. Husbands and wives may not agree about their family's financial strategies, so talking to their kids about money opens up an uncomfortable subject. Helping your children learn about money may be something you would like to leave "until they are old enough to understand." But if you wait until your children leave home for college or a job, you will put them at a big disadvantage. Living on their own means they will be taking on new responsibilities managing their expenses along with experiencing a new school or work-related pressures, all at once.
If you are hoping that they will learn about money management without your help, at school perhaps, that is unlikely. A class in personal finance used to be a graduation requirement for Oregon students - teenagers were taught about banking, saving, credit, and budgeting. Since the requirement was eliminated several years ago, only a few high schools still have this offering. Some of this content is covered during junior or senior year economics courses, but the practical, day-to-day lessons of dollars and cents may not be included.
So the responsibility to develop a good foundation in money management rests squarely on your shoulders. Your children's education about money should include the concepts of earning, spending, saving, borrowing, and sharing. But before you begin, you may want to consider these questions:
- Can our family discuss money issues openly, without conflict? What issues do we as parents need to resolve to be able to do so?
- How should our children "earn" money - through allowances or another method?
- What are our family values and attitudes about money? What do our children observe about our values and attitudes? What do we want to communicate?
- How might our children each be different with regard to handling money? How will we deal with these differences?
By learning about money, children are also given the opportunity to formulate their own values about income, life style, and work. This can be a powerful motivator in their education and career planning. As they identify their life style choices, they can connect career options that can meet their future needs. They will see that income is related to level of education, and they may make better choices about their education plans.
Money during college and beyond
Starting college or a first job means new responsibilities for your children. One of the biggest is taking care of their money. At this point of their lives, they may have developed the skills and conscientiousness required for responsible financial management. If not, you will want to help them create a budget and implement some good financial strategies.
How do I help my child set up a budget plan?
Help your children by going over this simple budget building process and making sure they set up ways to manage this budget regularly.
Creating a budget involves two basic ideas: how much money is coming in and how much is going out - income and expenses. The goal is to make sure that income doesn't exceed expenses.
Start by breaking out the year into manageable units. If your children are going to school, they may use months or terms (semester or quarter); if they are going to work, they will want to consider breaking the year into months. Since most bills are due on a monthly basis, reviewing one's budget at the beginning of each month will keep them on top of it.
Your children need to figure out how much money they can count on each month. For students, start by adding up all sources of income for the year: student loans, scholarships, work-study funds, parental contributions, wages from a part-time job, and savings they plan to spend this year on school expenses. Divide that amount by the number of months they'll be in school. If they plan to use that money to support themselves during the summer as well, they will need to divide their total income by 12. The result is their monthly income, the amount of money they can spend each month.
For your children who are working, their income may come from a single paycheck. If they are on commission, have only part-time work, rely on tips, or have any other variations in their income, they may want to determine a low and high monthly amount and budget their expenses according to the lower figure.
When figuring out income, keep in mind when they receive their money. Some loans or scholarships may not be available right away. Don't figure that money into a monthly income until the cash is in hand.
The next step is to add up monthly expenses. This is typically harder than figuring out income because they will be estimating expenses for many items.
Start with the biggest expenses and the ones that they know for certain. For students, this will be tuition and housing costs (rent or dorm fees). If you are developing a montly budget, divide any annual or term costs by the number of months in your budget to spread the cost evenly. Also add in the amount they expect to pay for books and school supplies. Costs vary, but most students spend about $300 per term for books. Divide by the number of months per semester to determine your monthly book/supply budget.
For your working children, the expenses they will know may be rent or house payments, car payments, car insurance, health insurance, telephone and cable costs - those items that have monthly costs.
They will also have to add in all of the miscellaneous living costs they will have: food, utilities, toiletries, car-related costs (gas and parking), laundry, travel expenses (to go home for holidays), and entertainment. Until they develop a record of expenses in these categories, the best estimate will have to do. One of the biggest pitfalls in budgeting for everyone is what's included in this "other" category. When developing a spending plan, your children may want to identify what are essentials and what are luxuries and whether they can or cannot afford the luxuries. Here's just a partial list of things people spend "change" on, without thinking about how it adds up: gum, candy, books, magazines, newspapers, tickets for movies or sporting events, CD's, DVD's, cosmetics, hobby items, gifts, and greeting cards.
Income versus expenses - a balanced budget
Once they have figured income and estimated expenses, they need to see if they will have enough money to cover expenses. If not, they need to review the expenses to see how they can either cut corners or increase their income through a part-time job or other means.
Keeping on top of how much they have to spend each month will help them make additional spending decisions, for example, whether they want to have a car with them at school, how often they will eat out, whether or not they will go to the movies.
Keeping on top of their budget plan is just as important as making the budget in the first place. That means comparing actual expenses and income to budget, preferably each month. If the budget was not correct, they need to make adjustments to bring it back into balance.
Here are some other tips to help them manage their budgets:
- Encourage them to keep detailed records of all expenses for at least six months while setting up their first budget. This will give them a good sense of how much they spend on all kinds of living and entertainment costs that can be hard to estimate.
- When big and unexpected expenses hit, suggest that they find out if they can spread payments over several months. For example, some schools will allow students to set up a tuition payment plan so they won't be responsible for the whole lump sum at once.
- Counsel them to resist the temptation to solve budget problems with credit cards. If they choose to use them, credit cards should be used only for expenses they know they can pay back immediately.
What if expenses are exceeding income?
If your children are having trouble adjusting their budgets so their total monthly expenses don't exceed their net monthly income, here are some tips on how they can cut back within each category of monthly expenses:
Get a roommate. Not only will they split the rent in half, but they will also be able to save money on utilities.
Eat in! Even a $.99 burger at a fast food restaurant is more expensive (and less healthy) than several sandwiches that they can fix at home. If they have to be away from home at lunch, pack a lunch.
- Transportation and car
Walk, ride a bike, use public transit, or carpool. Make sure they consider investing in a fuel-efficient car if they are getting a new one.
If they are paying their own utilities, they can save money by remembering to turn your lights off when they exit a room, taking shorter showers, and turning off the TV when not in use.
They should make sure their clothes are worth their price. If the number of dollars an item costs equals the number of times they'll wear it, then go ahead and buy it. (For example, if they want to buy a $40 sweater, they can ask themselves, "Will I wear this sweater 40 times?" If the answer is no, they may want to consider putting it back!)
Everyone wants to have fun, but entertainment costs can eat up a lot of one's budget. To save a few bucks, go to matinees rather than evening movies and skip the popcorn!
- School expenses
Explore scholarship options; not all scholarships are based on athletic ability or GPA. Pay your tuition bills on time to avoid late charges, or set up a payment plan. Buy used textbooks instead of brand new books and sell back used textbooks you will not need later on.
When getting prescriptions, always ask if the medication you need comes in generic. Buy discount cleaning supplies and buy items that you regularly use in bulk. Buy lower cost brands of shampoo, makeup, or other personal items instead of expensive name brands.
And here are some additional money management mistakes to encourage your children to avoid:
- Not keeping track of account balances
With all of the online tools available through banks and credit unions, there is no excuse for not tracking balances, at least on a monthly basis. The consequences of not keeping track can be expensive as bounced-check, ATM, and over-the-limit fees add up.
- Making poor choices about credit cards
Credit card companies are offering fantastic "deals" to students and young people, but as a rule it is better to avoid credit cards altogether. If your children do decide to get a credit card, make sure they pay the balances in full each month. There is nothing harder to pay back - or more expensive - than debt that piles up on a maxed out credit card.
- Letting friends talk
your children into spending money they don't
When friends try to pressure your children to go out to eat, go to a movie, or take a road trip, be ready with some alternate ideas for entertainment that fits into their budget.
- Lending money to friends
Giving someone a loan does not help them learn how to manage their own money and if there is any problem with them paying it back (as there usually is), it will stress a friendship, not to mention your children's own finances.
Always take a list - and stick to it - when they go shopping. Also, comparison shop and economize, even on everyday purchases.
- Not planning beyond immediate
There are always emergencies and unexpected expenses. There will also be future expenses that your children can start saving for now. Encourage them to make saving a part of they budget plan.