Kids and Financial Intelligence

15-33 Kids and Financial Intelligence

Marty Peterson: Millions of young people are in the process of starting their first year at college – and for many of those, it’s going to be their first time away from home. They’ll have to take care of their own finances now, and that’s a tough job if a student has never had a credit or debit card or a checking account before.  Dean Obenauer says that it’s not difficult, and they should spend the time to learn about personal finance before they head off to college. Obenauer is the assistant director of financial aid for financial literacy at Creighton University in Omaha.

Dean Obenauer: Half of the students are probably geared up to start thinking about finances. The other half is something they’re not quite ready to deal with. Every time I meet with students, I just tell them personal finance is not rocket science, but it is all about taking a little time to connect the dots and do the math. So it does take a little bit of time to be ready for it.

Peterson: One of the most important lessons a college student – or anyone else – needs to learn is how credit cards work. Obenauer say that the plastic is a big temptation for many students and not understanding the ins and outs of a card can put a young person in debt.

Obenauer: I think probably the biggest thing they don’t understand is a credit card is not extra income. So while it allows them to spend money, to fill up their gas tank, or go to the convenience store, it’s money at the moment. But then perhaps not thinking about, “Wow, I’m going to have a bill due in 30 days. I need a way to pay that back.” So, the biggest thing is that they understand that using a credit card is more like taking out a loan because you have to have a way to pay it back.

Peterson: He says that although you can use a credit card to buy almost anything, there are certain purchases that are better to charge than others.

Obenauer: I tell students to use a credit card for stuff that they would normally do anyway, like if they’re living off campus and they spend a hundred dollars a month at the grocery store. Then just use it for the things you would normally purchase every week or every month, and then the money that is in your checking account that you would have used to buy groceries, then you use that to pay off your bill every month rather than going and having more fun with that. So the big point is that make sure the credit card gets paid off every month so that there’s not additional finance charges or interest due. The biggest mistake where I see is where students may want to finance their new computer or a spring break vacation, and not really considering, “How am I going to pay that back?” So they end up making the minimum payment, which is all that’s required, but then they pay so much in interest and finance charges by taking longer to pay it off.

Peterson: Jeff Reeves says that parents can help their kids learn how to use cards responsibly by being involved in their child’s understanding and use of credit cards from the very beginning. Reeves is the Executive Editor of InvestorPlace.com.

Jeff Reeves: Responsible use of credit is a huge thing for people to learn. I think it’s important for teenagers and young adults going off to college to have a credit card, to have it for emergencies, but again, like I said before, people are going to make mistakes. Make sure that limit is low. Make sure you open the bills together and you talk about it. Make sure they know that they have help, but also that they have oversight, and I think the ability to learn and use credit and payoff your balance in full is an incredible life skill. I wish more people would learn that early on as opposed to maxing out their credit cards and finding out the hard way that this is not how you’re supposed to live your life.

Peterson: Obenauer says that putting a student on the parents’ checking account is not the best idea, because the young person shouldn’t think that they have unlimited access to their parents’ money. Instead, they should have a checking account of their own with a debit card. Finding the right debit card for a young person takes a little research, and it pays to shop around to get the most convenient and economical one for your student’s expenses and lifestyle.

Obenauer: I think they should be looking at the cost of the debit card. Some of them may have fees associated with it such as an annual fee, very expensive overdraft fees or late charges or over the limit fees, so it’s really important to do homework then as far as what the true cost of what that debit or credit card would be. So that’s a pretty important conversation they need to have with their personal banker.

Peterson: The next step in the financial process is the dreaded “B” word – budget. Reeves says that we should all learn to live within our means, and that begins with the basic knowledge of what’s coming in and what’s going out.

Reeves: Number one is a lot of people don’t even budget in the sense of knowing what their expenses and their income are. It kind of baffles me to think you don’t know how much money is going out each month and you don’t know what’s coming in. That’s particularly true if you have a job and you work somewhere at a pizza joint. Even if it’s with tips and it’s irregular, you have to know how much money you make each month. You can’t live your life guessing that you’re spending and you’re income are in line. The most important part of a budget is simply just be aware. It’s okay for things to come up or even to make mistakes, but a lot of people I think the fundamental problem is they’re not even aware. They don’t even know what they spend money on and they don’t even know how much they make.

Peterson: Budgeting takes a little time and, let’s face it, it’s not the most fun thing you’ll do in college. Obenauer says that he looks at it as another “plan” – just like scheduling classes, keeping up with exercise and making time for fun.

Obenauer: It’s basically sitting down and figuring out what do I have for the month or the semester, what are my expenses and then how am I going to make it work. So it does take a lot of thought, and for those students who don’t really know how to start, I pull out the old school method and say you know, “Write it down. Take the pencil to the paper and write down your income and your resources, and your expenses. Once you have a feel for that, then there’s a lot of free software out there, a lot of apps out there. I know you do everything on your smartphone, but to kind of get a feel for how it works, just try writing it down.”

Peterson: Part of the college experience is making new friends and going out to have fun with them. Peer pressure can upset even the most carefully laid plan of earning and budgeting. Why does it seem like it’s always your turn to buy that pizza and beer? Both Obenauer and Reeves says it’s tough to say “no” sometimes, but if you don’t want to go into debt then you’ll have to learn how to do it – and with conviction.  

Obenauer: That becomes a major discipline issue, meaning that you need to discipline yourself to make your budget work or else you’ll get into trouble. So that takes building some skill, changing some behaviors. If you just purchased a round and it’s somebody else’s turn and they’re trying to get you to purchase another one, then you have to be strong and say, “You know what? I just got the last one, you know, it’s your turn.” But it does take a lot of discipline to maintain it.

Reeves: I think one of the hardest things that people have to deal with, financial or not, is keeping good company. The habits of the people around you affect you. I have two daughters, and I really hope when they get to be of dating age, which will hopefully not be for thirty years or whatever, that when they decide they want to date and meet someone and hopefully build a life together with a partner, that it’s someone of like mind with them. It’s someone where they agree on the big issues. If you can’t agree on how many times you should go out, whether or not you should just get a six back of beer and a pizza and stay in, or go to a five star restaurant and put it on your credit card. If you can’t agree on that stuff, you sure as heck won’t be able to agree on a house, how to raise your children, how to love each other where you can both see eye-to-eye. This goes not just for marriage and partnerships like that, but also good friends. It’s really hard to have good friends when they don’t share your values. So, I would say that college in many respects is one of those times where you find out who you are and who you’re friends are.

Peterson: What if you do get into trouble with your credit cards, and you can’t seem to see your way out? Obenauer says it’s another question of discipline and sticking to a plan even though it might hurt.

Obenauer: Stop using that credit card. Put it in a bowl of water and then freeze it so you can’t use it easily, but then if a true emergency comes up, and I say true because we know that emergencies don’t happen at the mall. Some students may think there’s this great sale, I need to put that on my credit card. If there’s a true emergency, then they can thaw out that credit card in a hurry if they really do need it. The main point is just to put it away and stop using it, and if you don’t have the money to do something, then you don’t do something.

Peterson: Reeves adds that you will also need to streamline your budget so you can pay off the credit card as soon as possible and get rid of those finance charges.  Lessons about budgets, credit and spending shouldn’t wait until a young person is off to college. Both Reeves and Obenauer say that parents should start schooling their kids about money before they even get to kindergarten.

Reeves: I have a six-year-old and a four-year-old and we talk about money a lot. It’s not exactly adult conversations about mortgages and PMI, but it’s important for them to understand just how transactions work. I’m a firm believer in allowance. I’m a firm believer in kind of involving your child in as much responsibility as they can get. For instance, school shopping is coming up for many families. Instead of just telling your kid, you need two jeans and three t-shirts. Talk about how much money you plan to spend and then helping them budget that with you. I think it’s important you give kids responsibility early on, particularly because everybody makes mistakes. You want them to make mistakes small and under your roof as opposed to, you know, a freshman in college taking out a credit card and going to the bar with it. It’s better to make those mistakes at home first.

Obenauer: It’s just so important that parents have that conversation with their children early. I have heard that some parents talk to their kids more about sex than they do about money. So it goes back to the old kitchen table talk. Find some quality family time, let’s sit down and let’s start talking about how money works and what we do that works, what we do that does not work, and here’s some things that you can get ready once you get that first part-time job or once you get the Christmas gift from grandma. What do you do with that money? How do you make it work and how do you save?

Peterson: Dean Obenauer invites listeners to learn about financial literacy for young people heading off to college on Creighton University’s website, creighton.edu/financial aid. There you can link to a short video and articles on money management, credit scores and spending plans.  For the latest financial news and analysis from around the world, Jeff Reeves says you can log onto their website at Investorplace.com. For information about all of our guests, log onto our site at Viewpoints online.net. You can find an archive of past programs there and on iTunes and Stitcher.Our show is written and produced by Pat Reuter. Our production directors are Sean Waldron, Reed Pence and Nick Hofstra. I’m Marty Peterson.