Why is a therapist talking about personal finance skills? Too little or too much money creates problems. When students are at college, most are reliant on their parents. In the best case scenarios, our kids treat us with appreciation, gratitude and respect for what we provide. But most of the time, we’re treated like an ATM machine. They push buttons and expect money to pop out when needed. Expectations, assumptions, frustration, insecurity, and a whole lot of other problems stem from 1) parents not being explicit about money and 2) college students not having basic personal finance skills. Navigating college life is not just about academic learning; it’s also a crucial period for mastering personal finance skills. 

Developing good financial habits early can set the foundation for a stable and prosperous future. Here are essential personal finance skills that every college student should learn.

1. Budgeting

Budgeting is setting financial boundaries. I teach about boundaries in all sorts of aspects of college student life including with money. Budgeting is identifying and respecting the line. Creating and sticking to a budget is one of the most fundamental personal finance skills. Though it’s not instinctive to most. A budget helps students track their income and expenses, ensuring they live within their means. Here’s how to get your college student started:

– Track Income and Expenses: They can’t manage what they don’t measure. List all sources of their income, such as part-time jobs, scholarships, or allowances. Then, track all expenses, including tuition, books, rent, food, and entertainment.

– Categorize Spending: Break down expenses into buckets to see where the money is going. This helps identify areas where spending can be reduced.

– Set Financial Goals: Establish short-term and long-term financial goals, such as saving for a trip or paying off student loans. Realistic semester goals might include spending no more than $200/month on food delivery. College is not the time to build wealth, it’s a time to experiment. Experimenting with financial goals, normally on the constraint side rather than income side, is way more important. 

2. Saving Money

Practicing artificial constraint exercises distress tolerance for later in life. Learning to save is crucial for financial security and goes beyond money in its impact. College students should:

– Create an Emergency Fund: Set aside money for unexpected expenses to avoid financial stress. Rather than assuming parents ARE the emergency fund, encourage them to build their own account when (not if) things go sideways and they need cash. 

– Open a Savings Account: Use a high-interest savings account to store savings and earn interest over time. While I said college is not the time to build wealth, it doesn’t mean we can squirrel away some cash for bigger expenses either during school or after graduation.

– Automate Savings: Set up automatic transfers to a savings account to ensure consistent saving habits. Remove decision making from the process. 

3. Understanding Credit

Credit scores suck but they’re a part of our financial world like it or not. College students need to learn that credit is an essential aspect of personal finance, affecting the ability to rent apartments, get loans, and even secure certain jobs. Key concepts include:

– Credit Scores: Understand what credit scores are, how they are calculated, and why they matter.

– “Responsible” Credit Card Use: Use credit cards wisely by paying off the balance each month to avoid interest and build a positive credit history. Understand that credit card companies hunt and eat students alive. Consider these predators like the hungry companies they are and learn to use the credit cards like privileges rather than rights. 

– Monitoring Credit Reports: Regularly check credit reports for accuracy and signs of identity theft. Victims of identity theft are often not regular adults with FTE jobs. They’re often kids, college students, and the elderly.

4. Managing Debt

I tell students to always pay your debts – whether financial, psychological, or relationship. Debts haunt us and cause unnecessary anxiety. Many college students graduate with student loan debt. Managing this and other types of debt effectively is crucial:

– Understanding Loans: Know the terms of any student loans, including interest rates and repayment schedules. Also know that student loans are not forgiven if someone declares bankruptcy. 

– Avoiding High-Interest Debt: Steer clear of high-interest debt, such as credit card debt, by paying balances in full and avoiding unnecessary borrowing.

– Repayment Strategies: Develop a repayment strategy for student loans, considering options like income-driven repayment plans. Paying off debt aggressively (more than the minimum) is often the best strategy. 

5. Investing

Investing is providing capital into an asset that increases in value over time. We do that in relationships, we do that with physical fitness and nutrition. If we are exposed to it, we can learn to invest our money. Investing can help college students grow wealth over time once they have income. College students should learn:

– Basics of Investing: Understand different types of investments, such as stocks, bonds, and mutual funds. It’s also important to talk about the fees each financial vehicle uses to make money. 

– Compound Interest: Recognize the power of compound interest and how it can help money grow over time. Time is the greatest tool we have to build wealth. 

– Risk Management: Learn about risk tolerance and diversification to manage investment risks.

6. Financial Planning

Goals are not plans. Students need both to build a life for themselves. Creating a financial plan helps students set and achieve financial goals. The basics to teach your kiddo about financial planning include:

– Setting Goals: Define clear financial goals, such as saving for a down payment on a house or building a retirement fund.

– Creating a Plan: Develop a step-by-step plan to achieve these goals, including budgeting, saving, and investing strategies.

– Reviewing and Adjusting: Regularly review the financial plan and make adjustments as needed.

7. Understanding Taxes

There’s basic tax knowledge and then there’s the upper level tax knowledge used for tax avoidance (not to be confused with tax evasion, which is of course illegal). Understanding the basics is not just about how to stay on the right side of the law. It’s also about types of employment (eg. W-2 vs 1099), how taxes are used, and strategies to keep as much out of each paycheck to build a financial base. Tax knowledge is essential for managing personal finances, here are some good talking points:

– Filing Taxes: Learn how to file taxes, including understanding tax brackets, deductions, and credits.

– Tax Planning: Utilize tax-advantaged accounts, such as IRAs or 401(k)s, to minimize tax liability.

– Self-Employment: Lots of students fantasize about starting a business. Having their own can be exciting and provide opportunities. It can also provide pretty sweet tax advantages. 

8. Insurance

Insurance is vital for protecting against financial loss. Here are some solid talking points about how and why to get insurance:

– Health Insurance: Understand the importance of health insurance and how to choose the right plan.

– Professional Insurance: Any job that requires a license or credentialing requires insurance. 

– Other Types of Insurance: Learn about other necessary insurance types, such as renter’s insurance and auto insurance.

9. Have Fun

I’m frugal. I assume that every family I work with, no matter their net worth, is also frugal. But, I think a big part of learning how to manage money and establish good financial habits is learning how to spend money well. We need to learn how much money is the perfect amount to spend on fun vs. too much money with a low ROI on fun. We don’t get the lesson without pain.

10. Gratitude and Abundance 

This one is hard to teach so I encourage parents to focus on role modeling. Acknowledging that wealth, career paths, and most of what we cherish has a big element of luck and other peoples’ support. Talk about this. Let your college student hear from you about what you’re grateful for and how you’ve been lucky. Let them hear that the world has plenty of money, opportunity, and great people. College students are often, through no fault of their own, pretty self-absorbed. Helping see the interconnectedness it takes to build a career, build wealth, and build a family is one of the greatest lessons you can teach. 

Final Thoughts

A few final notes here. Mastering these personal finance skills can help college students make informed financial decisions, avoid debt, and build a solid foundation for future financial success. By taking control of their finances early when the stakes are low and they’re time-rich, students can reduce stress and pave the way for a financially stable and prosperous life.