College represents a new beginning, and it may be the first time that your child will be completely responsible for his or her finances. Help your student save money and budget for expenses by ensuring that he or she is set up with the right financial accounts.
While you can start by helping your child acquire a credit card with a reasonable limit, which will help build a credit report, you may also want to set up the following accounts in his or her name:
If your child is considered an adult—age 18, in most states—it will be possible for him or her to open a checking account. This is a big, and necessary, step in money management because your child will no doubt need to pay for things while away at school.
Make sure the checking account is opened at an FDIC-insured financial institution. Then, watch out for maintenance fees or minimum balance requirements that could result in additional charges. Fees like these can quickly bust a budget wide open.
Many checking accounts include a free debit card, so it’s important to talk to your college student about the importance of tracking spending to avoid overdrafts—and the charges that go with them.
Ask whether free checks are offered with the account (though your child may never use them), and inquire about online banking and bill paying options.
One quick tip: It can be helpful if you choose a bank that has branches in both your hometown and the location in which your child will live during college. That way, in an emergency, you can deposit money into your child’s account immediately.
College students also shouldn’t neglect saving. Help your child open a savings account and set up some sort of regular transfer so that money is consistently deposited into it from his or her checking account.
You should also talk about the importance of getting a decent return on savings account deposits. It can be a good idea to open a savings account with a bank—possibly an online bank—that pays a higher yield.
Retirement savings account
Retirement may seem light years away to your child, but the years fly by—as you already know. If he or she doesn’t have a retirement account, freshman year of college is a great time to open one. Due to the power of compound interest, the earlier your student starts investing in a retirement account, the better off he or she will be.
Your child can open an IRA as long as he or she has earned income. Counsel your child to have money from his or her college job automatically deposited into the IRA. Discuss the difference between a Roth IRA, which offers tax-free growth and tax-free qualified withdrawals, and a traditional IRA, which offers tax-deferred growth and tax-deductible contributions.
Some college employers offer students the benefit of an employer-sponsored retirement plan, such as a 401(k). If this is an option for your child, talk to him or her about depositing a portion of every paycheck into one of these plans.
Discuss the potential growth associated with long-term investing. Your student doesn’t need to make a huge contribution to a retirement account each paycheck in order to see good results over time. And, after college, he or she can boost contributions to see an even larger return down the road.
All parents want their children to start out on the right foot. Helping your college-bound student set up the right financial accounts now, and encouraging the proper use of these accounts, can lead to financial success in the future.
Miranda Marquit is a freelance writer and professional blogger specializing in personal finance, family finance and business topics. She writes for several online and offline publications. Miranda is the co-author of Community 101: How to Grow an Online Community, and the writer behind PlantingMoneySeeds.com.