CRASH COURSE ON FINANCE (For An Incoming College Freshman)

CRASH COURSE ON FINANCE (For An Incoming College Freshman)

Jan 16, 2013

Question: My daughter is a high school senior in an all-girls school here in our province and just passed the entrance exam of her dream university in Manila. I’m a little bit concerned about letting go of her to live on her own in the city. Aside from the many distractions and temptations I should warn her about, how can I give her a crash course on personal finance? – Mom Who Can’t Let Go via text

Answer: Congratulations to you and your daughter for making it to the university of her choice. College is a very interesting phase in life especially for someone like your daughter who will be studying in a co-ed school for the first time. I think that’s the bigger challenge for you. You have to prepare her to live on her own in the real world. But since you’re asking me to help you give her a crash course in Personal Finance, that’s what I will dwell on.

Let me just share with you what my friend did with her daughter who is now studying in the US. She and her husband sat down with their daughter to set the parameters of her study abroad. One of the rules was no boyfriend until after college; otherwise, mom and dad will fetch you and bring you back home, no questions asked. A lot of eyebrows were raised, including mine. How can a college co-ed in the US staying in a campus dorm, thousand of miles away from her parents not have a boyfriend? Weren’t they asking too much? Fast forward to today. This 21-year old co-ed is now in her 4th year, doing very well in school and still without a steady boyfriend. Now here’s the reason behind the rule. My friend knew that her daughter got herself into a very challenging course and she knew how much this means to her. And of course it was not a rule imposed unilaterally by the parents. All three of them agreed that she didn’t need that distraction and the rule was in fact a tool to help her attain her goal.

The point I’m trying to make is no matter what society says is acceptable and not acceptable, you, the parents, and your child know what’s best. Sit down with her. Come up with rules that will help her attain her goal in her dream university. These rules will keep her safe.

Personal Finance Crash Course:

Now for the money part, I don’t know how far you have gone in teaching your daughter about money. I hope that she is already used to having an allowance. Here are the things that she should know before she heads off to Manila.

  1. Orientation on basic bank products – If she doesn’t have one yet, open a savings account for her. It may go with a passbook and ATM (Automated Teller Machine) card. If it’s her first time to have an ATM card teach her how to be careful with it, and how to keep her passcode confidential. Do not give this information to anyone. An ATM card, most of the time, doubles as a debit card. This can be used to pay for purchases at commercial establishments like stores and even some schools. Checking account may also be opened either separately or in combo with her savings account if you deem it necessary for her to pay some expenses in checks rather than cash. Credit card may also be obtained for her as your extension cardholder.
  2. Terms and Conditions on the above products – Set your terms and conditions about the use of the above products. Agree on what mode of payment to use for each expense. As a general rule, it is best to use cash and refrain from using credit card during the training phase in anyone’s financial literacy. So just keep the credit card for emergency expenses. Agree on when you will fund her account(s). Monthly is best for easy accounting but see what works well for all of you.
  3. Budget – Together, write down the projected monthly expenses – rent, utilities, food, school expenses, transportation, entertainment, etc. Agree on a reasonable amount per item. It’s best to work on this in an excel file. Write down the expenses on the left-most column. The next column will be the budget amount. Then the next column will be the actual expenses made for the month. If you want to be more detailed you can have sub-columns to indicate what mode of payment was used – e.g. cash, debit card, checking, credit card, as discussed in the previous number. This will make it easier for your daughter to account for everything.
  4. Saving – If this is not yet a habit, now is a good time to train her to be a saver. Encourage her to be frugal by allowing her to keep for herself whatever she saves from the monthly budget. You will be surprised how creative she can get in order to save from her monthly budget. As she gets the hang of it, encourage her to practice setting aside her savings as soon as she receives her allowance from you. So her equation will become Cash inflow minus savings equals expenses. She can even open another account to set aside this money in order to make her savings more tangible for her. This is practicing “Paying Yourself First” which hopefully, she will continue to practice when she starts earning on her own.
  5. Investing – Aside from saving, you can already introduce passive investing to your daughter. Make her recall her lessons in High School Economics about inflation and tell her that her answer to this is investing her savings in instruments that beat inflation. Ask your bank what they can offer and choose what suits her needs.
  6. The value of Time – Time is the most important element in investing so when she whines about investing too soon, remind her that the sooner she starts, the sooner she can attain financial freedom.
  7. Financial Statements – Instead of just scribbling her expenses on her notebook or worse, any sheet of paper that will get lost, ask her to prepare her personal financial statements. The excel file on her budget can already function as her Income Statement. Anyway, her main “income source” is allowance from mommy. So just deducting her monthly expenses will already result to her “net income.” Who knows as she gets exposed to preparing her financials, she may be encouraged to augment her allowance by earning on the side. Then teach her to prepare a very simple Balance Sheet which will reflect her savings and investments and other assets that can be used to earn side income. This will encourage her to save and invest religiously, as she sees her assets grow. It’s also a practical preparation for her accounting subjects in college. Ask her to submit these statements to you every month via email.
  8. The value aspect – Make sure that the way you will structure all these money matters will agree with your family values. Remind your daughter not to make her purchases based on peer pressure. I know she will feel the need to belong to her new friends but remind her to always value her true self. This will make her a more interesting co-ed in her dream university.
  9. Follow Through – Whatever you agreed on, you have to follow through once she moves to the city. Be strict with your agreed upon budget but don’t stress about it. 

Good luck on your crash course. Maybe you can also have your own financial statements if you have not been doing this for your household expenses and investments. This way, the crash course can benefit you both!

Wishing you financial happiness,