Friday, September 6, 2013

Financial Wisdom for Students (Guest Post)

My son is almost 16 and, within the next year or so, will be making decisions about college and his future.  My husband and I have always tried to teach him how to manage money.  Still, to check whether we're on the right track, I was interested in what an expert would have to say.  The following article is from Steven B. Smith CEO of Mvelopes and author of Money for Life.

'money and savings' photo (c) 2012, 401(K) 2012 - license:
Most common financial mistakes for many students are caused by inexperience and the lack of understanding of basic financial principles. Here are foundational topics parents should talk to their upcoming college student about to help them prepare, plan, gain understanding, and protect themselves from a possible financial fiasco.

Living within your means. This simple principle of living within a monthly income will help your child determine and set the financial boundaries in order not to overspend. Once boundaries are set, help your student prepare a spending plan that outlines how every dollar of their income should be allocated. This is also a great way to protect them from accumulating debt. There are great FREE online apps, such as Mvelopes, to make this process easy and fun. Mobile friendly apps with frequent reminders and warnings will let your student stay on top of every penny spent or over-spent! Having a written plan is just the beginning.  In order for the plan to work encourage your child to measure the plan against real results by checking their online budget every day in order to make sure that the budget categories and the funds available in the bank account are aligned.

The principle of saving. Understanding the importance of saving will help prepare your student for any unexpected life events. It will also help them set short- and long-term financial goals. Saving is one sure way to break the debt cycle and to create financial margin in life. Help them do a little pre-planning. Think with them about possible worst-case financial scenarios and asked them "what if" questions to help generate solutions. Sharing with them your success or failure in the area of saving can help them better relate to the concept in a more tangible way.

Talk to them about establishing credit: Consumer credit scores will become very important to young adults, so teach them about credit scores and what can help them establish or destroy their credit.  Depending on how responsible and teachable your child is, you may consider adding him / her as a user on one of your credit cards to help develop a habit of responsible use of credit.  You can also pull a FREE credit report from any of the major credit bureaus and show them what type of activities are helping or hurting your score.

Can I say NO to my wants? This is a great question to ponder with your up and coming college student. The ability to delay gratification, developing the emotional "guts" to say NO, will give them a great financial upper hand in life. It will give them the financial freedom and financial options later on in life while those who fail to develop this habit will most likely live from paycheck-to-paycheck, stressed over debt and over their financial future. So help them think through the list of essential and non-essential items and encourage them to practice delayed gratification on those non-essentials. Peer pressure can cost your student a lot! Encourage them to look for positive influences and avoid pressures to constantly go out, spend money on restaurants and other entertainment.

Building a solid credit history. It's never too soon to help your student understand how important good credit history will be in the near future. Credit history, by nature, measures consumer's ability to repay debts and their demonstrated responsibility in repaying debts. Your student's consumer history (numerically represented by individual Credit Score) will be used when approving credit (credit cards, home loans, store cards, car loans, etc.). Credit history is also critical when renting an apartment, applying for utilities, cable TV, or even a cell phone plan. Everywhere they turn their personal credit history will be verified in order to access basic services, so it's critical they learn to behave in such a way that helps them establish and maintain a positive credit history.

Talk to them about the fact that a negative credit history will cost them money. This could be in the form of higher interest rates on a car loans, credit cards, or even home loans. Acquiring a habit of paying debts on time, every time, is critical in order to save money long term.


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