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A Money Lesson For Your Freshman

A Bulgarian man waves his national flags during an open air concert in Sofia, Dec. 18, 2006, held in support of five Bulgarian medics on trial in Libya.
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As new students crowd onto college campuses many are handling money on their own for the first time. Saturday Early Show personal finance adviser Ray Martin has advice for smoothing over your student's transition to fiscal responsibility.

Millions of families are sending high school graduates off to college and to a state of newfound freedom, responsibility and distractions. If you haven't done it yet, Martin says now is the time to lay the groundwork for how your freshman will handle money when leaping out of your nest.

Financial illiteracy is rampant among teenagers, says Martin. Only 40 percent of teens are taught economics in school, and a recent survey by the Chicago investment firm John Nuveen Investments found that nearly half of kids were never taught basic facts about money by their parents. So, before you ship your college freshman off, it is important to discuss some basic principles of handling money.

Budgeting

Sit down with your teen-ager and write down the basic expenses he or she will have. The list should include:

  • Day-to-day expenses like meals and transportation.
  • Regular monthly expenses like the phone, room and board.
  • Sporadic expenses like supplies and books.
Be specific and use dollar amounts. Identify "budget busters," those seemingly minor purchases that can wreak havoc with even the most well planned budget like dining out, CDs, and clothes. Make concessions for unplanned expenses like car repairs.

After you work out a budget, send your contributions in installments. Don't hand over a wad of cash in September. Using your budget as a guide, set up a checking account for the student and send money in regular monthly installments. After all, that's how things work in the real world.

Make it clear that you will not be sending advances should expenses build up, but that you are willing to review your budget periodically.

Banking

When you help your student choose and set up a checking account, keep three things in mind:

  • Convenience.
  • Fees.
  • Features.
Look for a bank with branches near campus. Many bank branches in college towns offer special student accounts with low fees and a low minimum balance. Compare ATM fees, wire transfer costs, and service charges. Also, some banks will forgo fees for June through August for students so they can leave their accounts active until they return for the fall semester.

Once you establish an account, don't assume your student knows how to use a checking account. It may sound obvious, but many young adults need a tutorial. Often parents think teens learn it in school, while schools expect it to come from parents.

Sit down with your student and explain the basics of banking, such as how to use checks and an ATM, and how to track a checking account. Some don't even understand that when they write a check they should consider the money spent.

Also explain that fes add up quickly when using other banks' ATM machines or cash machines in stores. Point out that the ATM machine screen can't be used to keep track of balances, and teach the student to write down every check, withdrawal, or debit card purchase in the checkbook ledger.

Credit

Credit cards are a fact of life for college students. Their very first days on campus, students are swamped with offers, which they can sign up for without parental permission.

Why is it so easy? Credit card issuers are betting that parents will bail out students who fall behind or rack up huge bills. They're also counting on brand loyalty and hope students will become life-long customers.

If your student does get a credit card, make sure these basic ideas are understood.

  • All credit card charges are loans.
  • Credit cards charge interest on any unpaid balance.
  • Minimum payments don't reduce the credit card bill.
  • Nonpayment will affect a credit rating.
A good rule of thumb is not to charge anything you can eat, wear, or drink. Encourage paying in full every month and explain the dangers of nonpayment. Not only will a bad credit rating affect your child's future chances of buying a house or getting a loan, but in the financial industries, some employers even check out your credit rating before they make a hiring decision.