Does Your Teen Know How to Manage Money?

Does your teen know how to manage money? Basic money management skills can “make or break” your new college student. Help them prepare for college by teaching them basic financial terms and principles!

Hey! Is your child heading off to college in the fall? Are they ready? I’m sure you have the academics all taken care of, but what about those all-important non-academic things your child needs to know? They probably haven’t had to deal with all those adulting skills yet. Things like banking, insurance, time management, self-care, and relationships. All that sort of stuff. (The things that most schools or curricula don’t cover!) So, consider this post Part 1 of a short series of posts about the non-academic stuff your child needs to know before heading off to college. (Or just living on his own.)

OK – so much for the intro. On to the good stuff. This post will focus on just one key area – Finances. Does your teen know how to manage money? What does your child know about finances, spending, budgeting, loans, and credit cards? This financial knowledge is so essential to your child and his future! Financial decisions your child makes in college can affect him for years so, teach him to make wise decisions!

Note: In the article, when I refer to “bank,” I include all banks and credit unions. It’s just easier to use a single word.

Another note: When I reference your child as “he,” I mean he or she; it’s just simpler to use one word instead of multiple pronouns each time!

And one more note: Anything included in this post is elementary! So, always do your research and make decisions based on what is best for you, your family, and your unique situation.

Money is a big deal to college students. There is never enough, is there? Tuition, books, lessons, supplies, clothes, pizza, laundry – everything connected to college costs money! Brace yourself – that’s just the reality of college life. I used to joke that the only time one of my daughters would call from college was when she needed more money for something!

Money is not a bad thing. It is part of how life works. The Bible never says that money is evil; instead, the Bible refers to the LOVE of money as a bad thing. Money is a tool that we exchange for goods or services.

Do your teens know how to manage money? And when there is a limited amount of money, being able to manage it wisely is so important! Have you taught them some basic principles of dealing with money? Let’s begin with some basic money management principles that your kids need to know.

Table of Contents

Basic Money Management Principles

Don’t spend more than you have
Keep track of your spending
Know what you are paying for each month (Set up a budget)
Learn basic financial strategies: credit vs. debit cards, savings vs. checking accounts, grants vs. loans
Know how to access your different banks and credit cards online
Don’t loan (or give away) money you need to pay your bills
Be responsible and don’t spend more than you have. (Does that sound like a repeat? That’s because it is SO important!)

So, with those basics in mind, let’s get into some specifics, starting with the difference between checking and savings accounts.

Savings Accounts vs. Checking Accounts

Savings Accounts

Your child may have had a savings account for years. Parents often set up savings accounts for kids when they are young, providing a relatively safe place to save birthday money, job earnings, etc. At one point, we could count on savings accounts to see some limited growth from interest payments. Not so much anymore, for sure! There are both benefits and limitations to savings accounts, though.

Benefits:

Secure place to keep some money for children
Limited access to money
Potential interest may help accounts grow

Limitations:

Limited access to money
Not much interest growth currently
Not convenient to access money

And those limitations are more pronounced once a child reaches college life. Sure, we don’t want them to blow off their entire savings account on a spring break trip, perhaps, but college-age kids need convenient access to money. (Just ask them!)

Checking Accounts

Before your child heads off to college, he should set up a checking account. A checking account will give him much easier and more convenient access to his money. Many financial institutions (banks or credit unions) offer college savings accounts. These can be a good deal for two reasons: first, a parent can be a joint account owner, and, secondly, college checking accounts usually come without fees or minimum balance requirements. Always look for accounts without fees or minimum balances!

Benefits:

Convenient access to funds
Can write checks to pay for items
Checking accounts usually offer access to credit cards and debit cards
Connect checking accounts with savings accounts to conveniently transfer funds from one account to another when needed.

Potential Problems:

Easy and convenient access to funds
The temptation to spend it all

Putting some funds in a checking account for your college-aged child can be a huge help and also a convenience for you and your child. Savings and checking accounts do not need to be at the same bank. In today’s world, it is easy to set up online transfers between accounts, even at different banks. Don’t forget to check out online banks as well.

Credit Cards vs. Debit Cards

Do your kids know the difference between credit cards and debit cards? It is so essential for them to learn! Your children need to understand the difference between debit and credit cards and how each works.

Debit Cards

Debit cards connect directly to a bank account. What does that mean? When you use a debit card, money immediately disappears from your bank account. You can think of a debit card as an instant check. Once you swipe that debit card, the money is gone! There is no grace period or opportunity to transfer the needed funds into your account. Why is this so important? If your child does not know this, he may incur insufficient funds fees and dig himself into a financial hole!

Note: It is possible to connect a savings account and a checking account, so a debit card transaction is paid from the connected savings account if the funds are not in the savings account. Check on that, and then decide if that is a good plan for your child.

Benefits:

An easy and convenient way to purchase items, either online or in-person
Managing spending may be easier since money is subtracted directly from his checking account and reflected in current balance information.

Potential Problems:

Directly tied to a checking account; if the card gets stolen, the thief has direct access to all funds in that bank account.
Easy to spend more than you have if you don’t keep track of your account balance regularly

Remember the first rule of basic money management: Don’t spend more than you have!

Credit Cards

Credit cards work differently from debit cards. A credit card issuer (Visa, Mastercard, Discover, etc.) awards you the privilege of buying goods or services without paying immediately. Instead, you receive a bill for the total you “charged” (or spent) to your credit card each month. And there is a due date for paying that amount.

But, hey, these companies are so nice they don’t require you to pay the entire amount. They will let you pay just a minimum requirement each month. BUT, here’s the kicker – they are not “nice” to you out of the goodness of their heart. That minimum payment comes with a hidden fee.

Sure, you can just pay that minimum amount, but the rest of the balance (the part you did not pay) gets charged a whopping fee – called interest. And credit card interest rates are HIGH! Like 19 – 24% added to the balance each month (or perhaps even each day).

You Don’t Want to Pay Credit Card Interest!

So, let’s say you pay the minimum payment required and carry a balance of $1000 over to the next month. If the interest rate is 22%, then, instead of owing $1000, you owe $1220. Then, let’s say you have an additional $1000 balance carried over to the following month. You will be paying interest on at least $2200. At 22%, that will come out to $2708.40.

Do you see how you can quickly get into big trouble with a credit card? Not only will the amount you owe skyrocket, but these unpaid obligations will also affect your credit score. Which, in turn, will impact future loan rates for car or housing purchases. The moral of the story is this: Always, always (unless there are extreme extenuating circumstances), pay your credit card bill in full each month!

All this brings us back to Basic Finance Rule #1: Don’t spend more than you have!

Credit Cards: The Good and the Not So Good

Benefits of Credit Cards:

An easy and convenient way to make payments and purchases
You don’t need to have the money in your account immediately
It May be a safer payment option than debit cards since credit cards are separate from your bank account

Potential Problems with Credit Cards:

Easy to spend too much money – more than you will have when it’s time to pay the bills
Interest rate fees on credit card balances are astronomical
Missed or delayed payments will affect your credit score for a long time

Credit cards can be a helpful tool for anyone if you are responsible, don’t carry balances from month to month, and can control your spending. Here are some valuable suggestions when getting a credit card:

Look for a card with NO annual fees
Look for a card with the lowest interest rate
Look for a card that offers cashback bonuses and rewards you can use

And the basic money management corollary to rule number one: Don’t spend money you don’t have!

Scholarships vs. Loans vs. Grants

When your child is preparing for college, parents (and students) look for all possible ways to lessen the impact of the cost of college. That just makes sense. Your child may be offered scholarships, loans, grants, and other options for covering college expenses.

Scholarships

Scholarships are financial rewards given to potential students based on numerous factors. Some scholarships get rewarded because of financial needs, academic abilities, athletic abilities, belonging to specific groups, etc. Some come as a result of entries in a contest, a written essay, and so on. A college or university, a religious organization, a philanthropic foundation, your local government, and many other groups can offer scholarships. Here are some suggestions for dealing with scholarships:

Understand the qualifications for applying for the scholarship.
Be prepared to follow the requirements for receiving and keeping the scholarship. Some require keeping specific grades, staying in an academic program, or even living on campus.
Follow all the rules for scholarship funds. What can you use the funds for, and what is a prohibited use?
Are you applying for a school or program eligible to receive those scholarship funds?
Do the scholarship funds come to you/your account, or are they directly applied to your student account at your school?

Grants

Grants are funds given either directly to you or applied to your student account at your college or university. These grants are like free money:

The most common of these are Pell Grants.
Family income and assets determine qualification for Pell Grants. Your FAFSA application lets you know if you qualify for these.
Grants DO NOT require repayment.

Loans

School loans are just that – loans. And that means you must repay these loans with interest. So, consider school loans carefully. Like many other things, they can be a helpful tool, but at the same time, they can drown you in debt for years! Here are some things to consider before taking out school loans:

What is the source of your school loan? Are you looking at government-backed loans or private loans?
What is the interest rate for that loan?
Are your future job and income opportunities able to repay that loan? Be realistic!
What are all the terms of the loan? Always read the fine print!
How will your loans affect your plans and prospects for your future?

Use wisdom, and take advantage of careful counsel and advice before deciding to take out college loans.

Does Your Teen Know Basic Money Management?

The sooner your child learns and understands basic money management skills, the better prepared he will be for adult life. He will save himself (and you!) many headaches and difficulties if he can get his finances under control from the beginning of his “adult” life! So, what does your child need to know about money management?

Keep track of account balances. Your child should always have a pretty good idea of how much money he has in his bank accounts.
Be aware of how much he is adding to credit cards each month. Does he have enough in his bank account to cover those credit card bills?
Understand what he is spending each month. Have him list all his expenses for a couple of months, including everything from tuition and rent to food, phone, gas, utilities, insurance, coffee, pizza, entertainment, etc. Once he sees how much he is spending and where the money is going, he can look more objectively at how to limit that spending, if necessary.
Set up a budget. Once your child sees where his money goes each month, he can better organize and prioritize his spending.
And don’t forget that first rule of basic money management: Don’t spend more than you have!

I know; this post included a lot! But I thought these issues were important enough to cover, though. I know from experience what it’s like to get kids through college. I have talked these same issues through with our kids. We had one get in trouble with a credit card. We have some kids still paying on student loans while others have theirs all paid off. As homeschool parents, we often focus on teaching all the academic stuff we forget to teach the practical life skills. Be sure your teen knows at least these basic money management skills before heading off on his own. I hope this helps at least one of my readers.

Part 2 of this series will focus on insurance and college students. Do you know how that works? Does your child?