by Andrew Sivertsen, CFP®
Summer is over. We can either lament its loss or look forward into the future with excitement for what new opportunities lie around the corner. For students and their parents this joy could be clouded with confusion around finances. No one wants to ruin their college experience with money woes, so here’s a quick crash course in the basics. Don’t worry there isn’t an exam at the end.
Step One: Know Your Resources
The conversation about money between parents and students should start early. Who is going to pay for the next four years? Discussions could begin as early as junior high and become more in depth during high school.
For parents/grandparents who want to help family members pay for college, consider setting up a 529 plan through your state of residence—especially if the state offers a tax deduction. Parents should estimate how much they can help their children out monthly during each college semester as well. Parents and students should consult high school and college counselors and financial aid officers for scholarship and grant applications—and apply for them as early as possible.
Next up is filling out your application for financial aid. Both parents and students should visit www.fafsa.gov. The 2018-19 aid application became available last October, and the 2019-20 application was posted online on October 1. Once that’s done, head to www.studentloans.gov to get all your loan questions answered. Parents should be extra careful when planning how much debt to take on so as not to jeopardize their own retirement. Likewise, students should try to limit their debt load so as not to graduate with more debt than their expected first year’s salary.
Step Two: Make a Cash Flow Plan
Ban the word budget and work on creating a cash flow plan. It will give you much more flexibility and options as the future changes. For clients of The Planning Center, you can request a login to First Step Cash Management System for your students to use.
The concept behind the First Step system is simple. Students can setup a master checking account and have all resources deposited into the account. Tally up all of your monthly, quarterly, and annual bills to determine how much of your resources will need to go to paying these bills. Next, come up with a weekly allotment to give yourself each week for variable costs like food, gas, entertainment, and personal care.
Setup a separate checking account to transfer this amount each week automatically. If funds run low one week, be frugal and say “no” to entertainment requests that cost too much. Finally, earmark a little each month to move into a savings account so that you have reserves you can tap into for bigger ticket items like trips, car repairs, or other unexpected needs and wants.
Step Three: Utilize Credit Wisely
The delicate balance of using credit cards and doing so wisely doesn’t have to look like a circus act on the tight rope. Building a good credit record is important for college students if they expect to get out of college and gain the ability to access credit for big purchases like cars and houses. Look for a credit card that does not have membership fees and starts off with a low credit limit. Make sure to use the card only for bills that are planned for in your cash flow—unless you have the money in your savings account to cover the expense. At the end of each month, you need to be able to pay off the credit card balance in full to avoid those high interest charges. Whatever you do, don’t sign up for every credit card you’re offered because you get a free t-shirt or some other perk.
Step Four: Save as Much as Possible
College can be immensely expensive. It is a time when a lot of financial resources are being invested to enable students to be able to earn a higher income for many years to come. However, it’s important to remember that it’s never too early to start saving for the future.
If you have earned income as a student from a summer or college job, consider opening a ROTH IRA and putting in a little bit of your paycheck into it each month. The limit for 2018 is the lesser of earned income or $5,500. When you contribute money to a ROTH account, the money goes in after taxes, grows tax exempt, and comes out tax-free.
Plus, the most important dollars saved for the future are the first ones put in, because they have the longest time to grow through compounding returns. If a student has earned income but can’t afford to put in money, perhaps a parent or grandparent would be interested in gifting the money to them to fund the ROTH IRA. Use your financial planning as a teachable moment for future savings and habits.
Congrats! If you made it this far you’ve graduated this crash course in Finance 101. Know your resources, make a cash flow plan, utilize credit wisely, and save as much as possible. Have fun this year and talk to your financial advisor if you have additional questions.
Andrew Sivertsen, CFP®, is a Sr. Financial Planner in the Quad Cities office of The Planning Center, a fee-only financial planning and wealth management firm. Email him at: andrew@theplanningcenter.com.
