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Thursday, 7 May 2015

Your baby is finally heading for college. But they shouldn't be a baby any more — especially when it comes to financial responsibility.

Unfortunately, most college freshmen aren't equipped to make sound financial decisions. The National Financial Capability Study found that 89 percent of college freshmen surveyed scored a "C" or lower on a test of basic money skills, including the importance of a credit score, what "net pay" really means, and typical paycheck deductions.

That's the bad news. The good news is that it's never too late to learn basic money skills. Before moving your student into their new dorm room, make sure they're equipped with these essential financial management tips:

1. Create a budget and stick to it

Help your student outline how much they'll need for monthly expenses: housing, utilities, food, transportation, insurance and entertainment. Create another budget for less frequent expenses, like textbooks and traveling home for the holidays.

  • Open a checking account in the student's name.
  • Use Mint.com to create a budget and track expenses, and have the student install the app on their phone.
  • Make sure your student knows the importance of monitoring these accounts on a regular basis — not just to stay up-to-date on the balances, but to watch out for credit fraud and possible identity theft.

2. Taxes

Your student may have had a seasonal job before, but going to college is a good time to reiterate how we pay taxes.

  • Go over all the items on a pay stub: Federal, state and local taxes, Social Security, and Medicare. This is where they can learn the definition of "net pay."
  • Use this IRS withholdings calculator to walk through the process of finding the right number of deductions.

3. Savings

A full 70 percent of Americans aged 18 to 29 have no retirement savings, according to this Bankrate survey, and 30 percent of all Americans have nothing socked away for old age. Retirement may not be a priority now, but it's critical that young people understand the perils of living without a financial cushion.

  • Help your student open a savings account attached to their checking account.
  • Determine a sum or percentage to be automatically contributed to savings periodically, be it 5 dollars a week, or 10 percent of every paycheck. Many online banks enable customers to set up automatic transfers between their linked accounts.

4. Interest rates

College students who graduated in 2013 averaged nearly $30,000 in student loans in 2013. Whether choosing a savings account or financing a university degree, students must understand the so-called "miracle of compound interest."

  • Use this loan calculator with your student to understand payments and more importantly, the total amount paid. A $30,000 loan at a fixed 5 percent interest rate will cost a student a total of $47,500, and that's assuming all payments are made on time.
  • Do the reverse. This compound interest calculator illustrates the power of savings and how compounded interest begets more interest. This will give your student an opportunity to plan the seeds about the importance of investing long-term.

5. Credit score

College is a good time to begin establishing a credit history. Explain to your student the importance of a high credit score: it helps get favorable interest rates on loans for a home, car or business, getting their own phone plan, and even applying for a job.

  • This Investopedia article is a good primer on how credit scores work.
  • Open a credit card in your student's name (people under aged 21 must have an adult co-signer, or prove they can pay the bill independently). Explain the importance of responsible management and help them automate a system for timely payments

6. Debt

A full 7 in 10 college seniors graduate with student debt, and on average students carry a $500 credit card balance.

  • Explain the difference between "good" debt and "bad" debt. A mortgage or a student loan can be considered "good" since it's an investment in your life, but a credit card with a high interest rate can compound your debt if your student isn't careful.
  • Make sure your student understands how balance ratios, timely payments and new credit inquiries impact credit scores.
  • Revisit the loan calculators.

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