Sending your Kids to College – Advice from a CPA
It’s an exciting time of the year for America’s 18-23 year olds. The start of many university’s academic year is less than a month away, which is great news for Wal-Mart, Target and IKEA, but bad news for parents’ bank accounts.
Most parents raise their children to understand that asking specifics about finances is not appropriate. However, by the time children start applying to colleges they usually have a general idea of their family’s financial situation. While many of college’s “freedoms” keep moms and dads awake at night, it would be a mistake for parents to ignore the chance to discuss the financial freedoms of college with their children. More specifically, it’s an opportunity for families to start a conversation about budget planning.
Any parent reading this might laugh at that last sentence, thinking that any “conversation” with their kid will quickly escalate into an argument. However, the following steps should act as both a mediator in keeping discussions between families cordial and as a roadmap that keeps the conversation on topic. Furthermore, it should help children begin to understand and be comfortable with taking on more financial responsibility.
Fixed Costs. Start with creating a list of fixed costs. Many children might not fully understand the true costs of higher education. To help them, create a list together that illustrates the costs of tuition, room & board, textbooks and school materials. Also add costs indirectly related to school such as decorating and furnishing a dorm room. Beginning with fixed costs lays the foundation for what the budget will be.
Income Sources. Have your child identify their sources of income. This includes money saved from jobs, monthly allowances, scholarships earned, etc. Parents should also create a list of what they think their children earn. Comparing and discussing both lists puts into perspective how much your children should realistically contribute to the budget.
Spending Categories. Determine a list of “spending categories.” Again, parents and children should do this separately and then compare. Make lists with very specific categories as opposed to general categories. For example, instead of listing, food, clothes, entertainment, and miscellaneous, be more specific. Listing, groceries, eating out, clothes, movies, going out, gas, traveling home, emergency expenses, etc, will not only help in keeping tracking of expenses, and also helps parents understand what their children value spending money on.
Develop a Budget. This step is the most difficult and is the apex of creating a budget: determining how much parents and children should contribute to each category. Similar to steps two and three, lists should be made separately and then compared and collaborated. This process is also where the conversation can quickly become an argument. To avoid this, both parents and children need to generate clear reasoning to support each decision.
Solutions. Come up with creative, proactive solutions to the inevitable differences between the two proposed budgets. Unless your child is a wise and prudent spender, parents’ ideal budgets will be less than their child’s budget. Don’t let this derail the conversation. Two suggestions that can close the gap on monetary differences are jobs and scholarships.
A money map can help students analyze their cash flow (see “download pdf” to view our money map)
If your child wants more spending money, research potentially available jobs close to campus, discuss how much time they should work a week and how much money it would add to their budget. Even though jobs will double as resume builders, if your child is against having a job, don’t be frustrated. Instead, consider an alternative like scholarships.
Payment Plan. Once the budget is agreed upon, families should determine how the children will receive funds. Budgets are commonly built on weekly, monthly or semester deposits. If budgeting is new to your child, a weekly or monthly schedule allows for more parental control. However, if your child wants to be more financially responsible, depositing the full amount at the beginning of each semester makes sense.
For many young adults, college is a first chance at experiencing financial independence. College provides a unique opportunity for families to begin open, productive conversations about finances and budgeting. If followed correctly, this roadmap will not only mitigate the number of poor decisions your college-bound student will make, but will also begin to create a young, financially aware adult.