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Budgeting 102

Catherine Horiuchi, 1:28 pm ET

IT’S BEEN A MONTH since I dropped off my twins at college, one east, one west. Each has a debit card for an account with the credit union here in our hometown. One has downloaded the credit union’s mobile app. Both are already developing their own ideas and strategies for managing college life on a shoestring budget.

I got them their debit cards some time ago. I also opened a teen account for their brother, who is still in high school and at home with me. This past month, two of the three overspent, triggering an automatic draft from the savings side of their accounts.

One was my teenager at home, who miscalculated the cost of getting a pizza delivered. One of his siblings ran out of cash shortly after buying her textbooks. In both cases, there was sufficient money in their savings account to cover the excess, with a $5 service charge applied for the insufficient funds transfer.

My son and I had a long discussion about what had happened. This improved his understanding of debit cards and how to avoid future bank charges. He’s now getting his weekly allowance from me via automatic bank transfer. The allowance is sufficiently modest that it’ll be several weeks before he can again order a pizza for himself and a friend.

Meanwhile, I haven’t yet discussed the overdraft with his sister. I had told her I’d be putting money into her credit union account, but I hadn’t made the first deposit when she inadvertently emptied the account. I still don’t know precisely how much she needs every week, but I went ahead and set up a weekly deposit anyway. I’ll know if it’s the correct amount by trial and error.

I have much to learn about how today’s young adults develop budgeting skills. I’ve been browsing sites and videos that are oriented to those just starting out. It led me to send one of the twins—the one without the luxury of a college cafeteria and a meal plan—a kakeibo journal. Sure, they could set up an initial budgeting chart in any notebook, but they’re novices and a little handholding seems warranted. If it’s fun and attractive and friendly, all the better.

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An
An
7 months ago

I don’t get the reasoning of weekly allowances for college students. Most college students are capable of holding a job to earn money for their textbooks and incidentals, why an allowance? I suppose if they haven’t been taught about money management by this time, danger lies ahead.

Catherine
Catherine
7 months ago
Reply to  An

Good question.

My college student with an allowance has no meal plan, unlike her sister. The allowance is designed to cover the cost of preparing her own meals, nothing fancy. She is applying for jobs, and doesn’t want to depend on me for incidentals. However, if she were to spend an extra 15-20 hours a week studying, instead of working at a job, that is worth the tradeoff of needing a slight bit of family support from home. Both my students have an opportunity right now to spend time in expensive-to-maintain labs, computer labs with better equipment and software than they’ll have at home for many years, and scientific labs. That’s where I’m encouraging them to spend any “spare” moments, along with libraries, museums, school lectures, office hours with faculty, and out in public spaces.

Nate Allen
Nate Allen
7 months ago
Reply to  Catherine

I am with Clark Howard that college students working up to 20 hours a week produces a better adult than not working. Anything over 20 hours does begin to cut into school work, but generally something in the 10-20 hour/week zone tends to cut out unnecessary social time, adds life lessons not learned in the classroom, actually creates a better grade outcome, and (last but not least) produces income.

Obviously every student is different and some might react better than others to certain situations, but this seems to be the case with the majority of students.

gregorit
gregorit
7 months ago

Don’t want to rain on anyone’s parade, but debit cards are terrible for young people. They do not teach good habits, don’t help establish/maintain credit scores, minimal protection against fraud or inappropriate usage, no benefit programs (cash/travel points) and can’t help you in an emergency. Far better to teach kids how to prudently leverage and manage credit. (Yes, KIDS, don’t wait until they’re young adults, mine were joint users before the age of ten!)

Catherine
Catherine
7 months ago
Reply to  gregorit

Thanks for your thoughtful comment. Your perspective and mine on use of credit cards differ.

I understand the financial and legal distinctions between debit and credit cards, and discussed these when I got them debit cards. But I have absolutely no intention to being a co-signer or joint owner of a credit card with any of my kids. If they blow out their debit card, then they are out of money, period.

The national fiasco of student debt is, in my opinion, one unintended consequence of loaning thousands of dollars to young adults who only weakly imagine at the time of borrowing the effort and cost (real dollars and psychological) of paying back debt after graduation. No matter how carefully I have prepared my children for young adult life, they are now immersed in a world that they may not be able to navigate on their own earnings, yet.

If the direct cost of not having a credit card before their early-/mid-20s is an extra percentage point or two in expenses (the value of many benefit programs), then that’s the price of getting to the point where they can establish credit based on their own earning records.

Planning to use a credit card as an emergency source of funds is, again, only my opinion, inferior to starting and building a “rainy day” fund, but maybe that use of credit works for you and your family. I think many so-called emergencies are ordinary, known problems that happen to most of us at some point in our lives. Best to get started early on how we are going to deal with them. Many possible strategies to consider, beyond borrowing.

The question of building a good credit score is one I’d like to see discussed more frequently. Conceptually, the point of a good score is to get a good rate on a loan, but for whatever reason in our society we’ve let this morph into something quite ugly, in my opinion, when people’s credit scores are checked for all sorts of non-monetary reasons (and some states are banning this). Again, until they have steady employment, I would discourage them borrowing, and a good credit report is not yet an essential item.

gregorit
gregorit
7 months ago
Reply to  Catherine

Yup, every family is different. If my kids had a financial mishap or goof, my wife and I would never ‘walk away’ and use the experience to punish them or teach them a lesson. Life is too short and family too dear.

WRT Credit scores: You may think the ‘point’ is ‘getting good rates’ but that’s just not the case and hasn’t been that way for decades. Employment, commercial, and rental business activities often need surrogate checks for financial background checks and the credit agencies fill that need. For my rental properties, I can’t imagine having to get that info on my own, nor could I blindly trust what the applicant provides on a form.

Gene Simmons
Gene Simmons
7 months ago
Reply to  Catherine

As someone who just put three kids through college, let me explain the advantages of credit cards. First, you do not need to cosign. There are secured and college credit cards for people with no credit history. Secured cards require a $500 deposit and you must top it up each month. After less than a year, you can call them and convert it to a non-secured card.

By the time my kids graduated, they each had nearly 800 credit scores. One got a job traveling the world, and immediately got an American Express Platinum card, so he gets free airport lounge access, meals, express check in, free baggage, express check in, hotel discounts, and tons of other benefits. The other one has a domestic job and got an AMEX Blue card for 6% back on groceries. The third one still has her college cards, but is in her final year and will likely upgrade to better cards when she graduates.

All three are fantastic budgeters and are into this minimalist thing. Credit has not ruined them, it had taught them discipline, partly because they are obsessed with keeping their credit scores high by paying their cards each month and building their savings.

gregorit
gregorit
7 months ago
Reply to  Gene Simmons

”Credit has not ruined them”
100% agree, my kids also had 800+ scores upon graduating. My kids have always been responsible, at least about important things, and steering them to debit cards would be treating them like infants. They are now keenly aware of the various travel/bonus/cash back decisions to be made and know that paying finance charges is the 8th deadly sin.

Catherine
Catherine
7 months ago
Reply to  Gene Simmons

I really appreciate you taking the time to elaborate this strategy, which is worth looking into. Thanks.

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