Motivating your kids to start saving early is awesome, but parents also worry about maintaining eligibility for college financial aid. Let’s take a closer look at how to manage savings and build a healthy financial habit for life.
The number one way for students to begin saving early for college is to actually do it. The act of taking money and allocating it into a college savings account is instrumental. Not only does this help education funds grow, but it also fosters healthy financial habits for life. Here are some great ways for parents to help their children get into savings mode!
Begin with financial literacy
It’s all about money fundamentals: how to spend it, how to save it, and how to make it grow. Parents should help their young children understand basic financial literacy concepts by explaining different coins and bills. As children mature it’s time to bring up checking accounts, debit cards, investments and different kinds of savings vehicles. The key is to have an open conversation about personal finance so kids learn that money is something to manage with thought.
Learning about budgeting
Take the opportunity to record basic expenses (the grocery bill) and use it as a learning tool. Categorize the expenses and show that income pays for it. Show that to increase savings, there may be ways to reduce expenses, like buying on sale or not purchasing unnecessary items. From there, a direct line to savings is generated. The 50/30/20 method of budgeting suggests breaking expenses into categorized percentages: fixed costs, financial goals, and flexible spending. Savings becomes a built-in feature of the budgeting process.
Put a percentage of gifts away
Gifts from birthdays and other holidays are great opportunities to boost savings. Set goals to save a high percentage, but it’s ok to spend a little because kids need to have fun! The real trick is that the savings are beginning early, allowing money to compound and grow.
Employment for young adults
The most straightforward way to earn money is through consistent employment. A student’s first priority, especially in high school, needs to be their education. However, part-time local jobs give the opportunity for extra earnings. Babysitting is a great job for high schoolers, providing work flexibility and often a convenient location nearby. Other jobs may include weekend shifts at grocery or convenience stores, working in a bakery, golf caddying or serving in a restaurant. Students with an entrepreneurial streak might start their own dog walking business or make crafts to sell.
Having a good plan in place is a good start, but what’s more important is putting that plan into action. Setting up automatic savings from a student checking account can help build consistency. It’s important to stick with it until it becomes second nature. (For some savings inspiration, take a look at the America Saves events promoting a healthy financial habit for life!)
But I’m worried about losing financial aid eligibility
Financial literacy brings families together with a shared goal of greater prosperity. Parents can help set up the paperwork for a college savings plan while their children follow through with their consistent plan to earn and save money.
Some parents worry that savings substantially reduce the amount of financial aid a student qualifies for. This can be technical but the bottom line is that college savings have a minimal impact on financial aid if saved correctly. Money in a child’s name is counted as a specific student asset, as opposed to being a parent financial asset, reducing financial aid eligibility.
This presents a sticky situation when it comes to college savings and financial literacy- parents want to encourage savings, but do not want to suffer by losing free financial aid money as a result.
There is a way to reduce the impact. By keeping college savings in the parent’s name, it substantially reduces the effect on financial aid. The financial aid formula assumes that 20% of student savings are available to pay the college bill, but counts the same savings in the parent’s name (like a 529 Plan) at 5.64%. No wonder there are more than 13 million 529 college savings plans currently open with more than $320 billion saved.
In conclusion, start saving early. Use financial literacy concepts and build towards a smart strategy that encourages children to save often and allocate savings towards vehicles that can grow money while maintaining financial aid eligibility. It’s a step-by-step process, but “saving a dollar today is better than borrowing one tomorrow.”