We’re pleased to provide you with insights like these from Boston Private. Boston Private is now an SVB company. Together we’re well positioned to offer you the service, understanding, guidance and solutions to help you discover opportunities and build wealth – now and in the future.
Sending your child off to college for the first time can be a hectic – not to mention, emotional – time for everyone involved. But as you work with your student to check off lists for new clothes, dorm furnishings, study supplies, and computer and smart-phone accessories, don’t forget to add a few legal and financial “must haves” too. That’s the advice from a mother of two successful college grads, Marilyn Tressel, Senior Vice President and Credit Officer, SVB Private.
For emergencies: a health care proxy and Power of Attorney
Before your student leaves for college make sure you get permission to act on his or her behalf in an emergency. “One of the first things I always tell parents when their children go off to college is that they should get signed health care proxies from them,” says Tressel.
This is easy to overlook she says, but it’s critically important because “once your children reach age 18 you can’t get access to their health records if they become incapacitated or unable to make decisions for themselves. Without a signed form, you have no rights.”
The same goes for a power of attorney document, Tressel explains. “You’ll need it if something should happen and you have to stand in for your child legally or financially. Everybody should have a backup, and kids rely on their parents for this. The document helps formalize and legalize it.”
For everyday finances: a checking account, debit and credit cards
If your college-bound student hasn’t been responsible for managing his or her own money, this is a good time to put them in charge – with some limits and guidance, of course, says Tressel. This includes working with your child to set up a checking account, get debit and credit cards, and discuss priorities for spending and saving.
- Open a student checking account with an associated debit card.
“You can deposit a set amount into this account every month to cover out-of-pocket expenses such as personal health and grooming items, school supplies, and entertainment. Your student can then manage this money by setting cell phone alerts to track spending,” she explains.
Tressel believes that giving your children a chunk of money to manage makes them think a bit more about how they intend to use it and make it last. “Kids today tend to use debit cards for everything. They don’t even carry cash. Having a checking account with a debit card and making sure that the funds are in the account before using it offers important lessons in money management. It also helps students become responsible for their spending behavior,” she says. “If they have some money left over, they can always do something fun with it.”
When her children went to college six years ago, for example, Tressel and her husband gave them $300 each month for incidentals and travel. (The couple covered large ticket items like books, winter coats, and boots separately.) This was in keeping with the routine they had started in high school to help their kids think more broadly about managing money, she says.
“Instead of an allowance during high school, we gave our kids money quarterly to budget for clothes, other items, and activities. Then we shifted to monthly once they were in college, so it would be more like getting a paycheck,” Tressel explains.
After their children graduated from college, she and her husband continued to put the same amount each month into their children’s investment accounts both to give them a head start on their first job and apartment and also to take advantage of dollar cost averaging.1
- Get a credit card to begin to establish credit for the future.
Tressel suggests exploring the many student credit card options available today to find the best rates and terms. Some may require a parental co-signer. Others may have a set limit to start. But, again, managing a credit card account in a more controlled situation is a good way for a first-year college student to learn how to moderate his or her spending and pay down debt quickly, before it becomes unmanageable.
“They need to learn how to use credit wisely,” says Tressel. “Plus, when they finish school and purchase a car or rent an apartment, having a good credit track record is really important.”
- Set expectations about spending and saving – as early as possible.
Tressel also stresses the importance of being a good role model and explaining trade-offs to children who are on their own financially for the first time. “Having a conversation about expectations early – preferably in the early years of high school, but certainly before they start college – is ideal,” she says.
“I think some parents inadvertently set their kids up for failure because they don’t have a conversation during high school and college years about what they really can afford to spend. Then, once the kids are out on their own, their dreams are crushed by debt.
“You don’t necessarily need to teach them all the personal finance and investing concepts they might need when they’re in their 20’s or 30’s but you can at least give them some idea about how to budget and how to make decisions and trade-offs,” she suggests.
For the future: an IRA helps make saving a habit
If your college-bound student has a summer job or paid internship, or is self-employed, consider having him or her open an IRA2 now and start putting a small amount away every year.
“In the summer [before] college, if they’re in a job where they get a salary, I recommend opening an IRA and contributing a small amount from that paycheck. Even if it’s only $500, just getting them in the mindset to start saving for retirement at an early age is important. As everybody involved in the financial world knows, the sooner you start putting money away, the longer it has to potentially build future income for you.”
“If you can afford to do it, try to match their contribution as well,” suggests Tressel. For her own kids, she says the match “helped them understand the benefit of the employer match when they started working after college.”
Although her children have both graduated from college and are on their own now (one is returning to school for a business degree and the other is focusing on a career in public health policy), Tressel continues to help young adults manage finances by being involved in Boston Private’s Thrive Scholars (formerly known as SCS Noonan Scholars) mentoring program, which operates in Los Angeles and Boston (see our profile of Steve Stein, CEO of Thrive Scholars here.)
In addition to offering lessons in money management to other mentors, she coaches a promising young woman who is majoring in chemistry and Japanese and spent the summer in Japan fine tuning her language skills before returning to college on the East Coast. “Because she is on a full scholarship and is able to cover her essential expenses with a debit card, she is currently in good shape,” Tressel says. In the coming months, however, Tressel plans to talk with her protégé about budgeting for the future, getting a credit card to build her credit score, and eventually saving some of her pay in an IRA.
1 With dollar cost averaging, you use the same dollar amount each month to purchase shares in a mutual fund. If the share price falls, you purchase more shares that month and if the share price rises, that same dollar amount purchases fewer shares. Over time, the dollar cost averaging technique may lead to a better overall cost-per-share.
2 For 2018, maximum total contributions to traditional and Roth IRAs of earned income (taxable compensation) is $5,500 ($6,500 if you’re age 50 or older), but contributions cannot exceed what you earned. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits