While everyone loves holiday presents, one great gift parents can pass to their children is a discussion about money and making a budget.
Ok, it’s not the most exciting topic, but it is one that high school and college students need to think about. For the pre-high school crowd, a basic understanding of saving and spending goes a long way to setting them on a course for success in the years to come.
Students as young as elementary school can be introduced to the basic concept of budgeting by developing simple money habits. Here are some great tips from Sesame Street about teaching younger children about budgeting. They can learn about making economic choices and budgeting by depositing their cash into one of three jars: spending, sharing and savings. A very simple but effective first lesson about budgeting and money management.
For older students, having a disciplined approach to money becomes an essential life skill that can prevent impulse spending and foster great money management habits. But it can be easier said than done!
For example, your student may want to buy a pair of very expensive designer jeans. Can you imagine jeans that cost $300 (or more) that their friends are buying? As parents, we can help set standards by calling out overly expensive items as we see them to help high school and college students make better choices about how to allocate scarce budget dollars. These are the same lessons and skills taught by Sesame Street via the three jars.
Here are a few topics to discuss with your older children.
Having purchase strategy (a.k.a. a Spending Plan)
When considering costly purchases, such as electronics, a college education, car, or a big vacation, focus on research – not just word of mouth and advice from friends. Students can start by comparing costs and understanding price differences between products or vendors (including colleges) to determine who offers the best value for the dollars spent. This can be tricky as spending on a vacation is an experience that is grounded in emotional fulfillment while owning a car might be more about practical transportation that may also have expensive, unnecessary, amenities. Budgeting for college expenses has an added layer of complexity because student loans may be too easy to get leaving students an emotionally fulfilling experience today followed by years of regret later when they are forced delay purchasing a car or a home.
One key is to help high school and college students be realistic about items in their budget. No doubt allocations have to be made for necessary items such transportation, books, clothes, fast food, entertainment, smart phones, personal items and other day-to-day spending requirements. This is realistic and necessary spending required to live day-to-day. Some students may need to borrow for some or all of these expenses.
Other spending should not result from borrowing. For instance, spring breaks or the latest breakthrough in flat screen televisions. For students with savings and some means, value shopping for these items may be appropriate. Particularly if they value shop – perhaps using the internet to research, compare prices and read reviews. That vacation may be more affordable using a different hotel, or a better deal on a used car may arrive just in time while looking at other options. For most students, these expenses should be avoided.
Adding new expense categories to a student budget
Many parents who are decades removed from campus life often shake their heads at today’s student budgets because costly smart phones, tablets, laptops and Starbucks didn’t exist when they were budgeting. Like their parents, today’s students’ budget start with the basics — food, clothing, spending money — but may also include increasingly costly technology, such as thousand-dollar smart phones and laptop computers.
These upgrades are best funded from new resources, a part-time job or gifts, rather than student loans When introducing new purchases like these into a preexisting budget, students can start to look ahead creatively, understand the value of money and the time spent to earn it. How could extra money be earned to afford the upgrade? Is it possible to reduce expenses elsewhere? How long would it take to save the money towards purchase? All theses questions can be answered by first, simply creating a budget and establishing some baseline parameters as necessary. A student will become much more motivated to budget once they realize real concrete benefits like this.
Tracking spending = better spending
Whether making purchases by swiping a card, tapping a cell phone or using a new app, technology has made it easier than ever to facilitate everyday purchases. But it has also made it easier than ever to overspend! For today’s students, gone are the days of their parents’ anguish of waking up with $5 in pocket and no ability to access cash (and therefore not make a purchase) in the near future.
To help reign in incidental expenses, students should monitor their spending. Setting alerts on smart phones for purchases is one way to remind students to take a closer look at their banking statements to track purchases over time. Some patterns of habitual, unnecessary expenses might emerge that could easily be overlooked in the rush of life. The daily $5 purchase of that extra-large latte may be replaced with a $2 cup of coffee — saving $15+ dollars per week, that’s over $750 per year. Students may make different choices about small expense when they identify and project them over a year. Little bits add up fast. Then the student might commit to reducing that expense or maybe eliminate it entirely – especially when that money can be put back into the budget to make a more valuable purchase.
“Paying yourself first” with savings
My College Corner loves the phrase: Saving a dollar today is better than borrowing one tomorrow®. This circles us back to where we started – allocating among savings, spending and sharing, just like school children learning lessons on Sesame Street. Students with limited experience as consumers, at various levels of maturity and a sometimes open spigot of money in the form of student loans are particularly vulnerable. The fundamental key is being able to help them see the value of saving (or not spending) so they can make better economic choices that are value-driven. In effect, the saver (or non-spender) is “paying themselves first” by not allowing their scarce money resources to spent elsewhere.
Budgeting can be as simple as allocating resources to save for a future, near-term purchase such as the new high tech T.V., or as complicated as balancing current spending, paying down student loans and saving for a home or retirement. Parents can empower students from elementary school through college with common sense approaches to budgeting rooted basic choices among saving, spending and sharing. By having students pay themselves first, they take control of their personal finances and successfully achieve their financial goals.