The following piece is a blog post written by Prudent Money Contributor John Hupalo. John is considered one of the foremost experts on college funding and admissions. We are fortunate to have him as a part of our writers. If you have any questions for John, be sure and email him at email@example.com.
Motivating your kids towards saving money is awesome, but parents also worry about maintaining eligibility for college financial aid. Let’s take a closer look at how to manage savings and build a healthy financial habit for life.
The number one way for students to begin saving early for college is to actually do it. The very act of taking money and putting it into a specific account for college savings is instrumental, not just for growing education funds but also learning a healthy financial habit for life. Here are some great ways for parents to help their chldren get into savings mode!
Begin with financial literacy
It’s all about money fundamentals: how to spend it, how to save it, and how to make it grow. Even with digital money and payment platforms becoming more common , parents begin to encourage their young children to understand financial literacy by explaining the different coins and dollar bills, and help them put money into a piggy bank or a savings account. As children mature it’s time to bring up checking accounts, debit cards, investments and different kinds of savings vehicles. The key is to have open conversation about personal finance, so that kids learn early that money is something to be managed properly.
Learning about budgeting
Take the opportunity to record basic expenses (The grocery bill is a perfect example) and use it as a learning tool. Categorize the expenses and show that income must be used to pay for it. Demonstrate that in order to increase savings, there may be ways to reduce expenses, like finding items on sale or not purchasing unnecessary stuff. From there, a direct line to savings is generated. The 50/30/20 method of budgeting suggests breaking things into percentages in the categories of fixed costs, financial goals and flexible spending, but there are many ways to do this. Savings becomes a built in feature of the budgeting process.
Put a percentage of gifts away
Gifts from birthdays and other holidays are great opportunities to boost savings. Set a goal for a high percentage to be saved, but it’s ok to spend some since kids need to have fun too!. The real trick is that the savings are beginning early allowing for more money to compound and grow.
Employment for young adults
The most straightforward way to earn money is through consistent employment. A student’s first priority, especially in high school, needs to be their education, but part-time local jobs give the opportunity for earnings. Babysitting is typically a great job for high schoolers providing work flexibility and often a convienent location nearby. When the kids go to bed, students can accomplish their homework too. Jobs may include weekend shifts at grocery or convenience stores, working in a bakery, golf caddying, or serving in a restaurant. Students with an entrepreneurial streak might start their own dog walking business or make crafts to sell.
Having a good plan in place is a good start, but what’s more important is putting that plan into action. Setting up automatic savings from a student checking account can help build consistency. It’s important to stick with it until it becomes second nature. (For some savings inspiration, take a look at the America Saves events promoting a healthy financial habit for life!)
But I’m worried about losing financial aid eligibility
Financial literacy brings families together with a shared goal of greater prosperity. Parents can help set up the paperwork for a college savings plan while their children follow through with their consistent plan to earn and save money.
Some parents worry that saving will substantially reduce the amount of financial aid a student may get. This can be a little technical but the bottom line is that college savings can have a minimal impact on financial aid if they are set up correctly. Money in a child’s name is counted as a specific student asset, as opposed to being a parent financial asset, potentially reducing financial aid eligibility. This presents an unfortunate situation when it comes to college savings and financial literacy; parents want to encourage savings, but do not want to be punished by losing free financial aid money as a result. There is, however, a way to reduce the impact. By keeping college savings in the parent’s name, it substantially reduces the effect on financial aid. The financial aid formula assumes that 20% of student savings are available to pay the college bill , but counts the same savings if held in the parents name at 5.64%. If college savings are held in a 529 plan they are counted at 5.64% for parents or students. No wonder there are more than 13 million 529 college savings plans currently open with more than $320 billion saved.
In conclusion, start early with financial literacy concepts and build up towards a smart strategy that encourages children to save early and often, and allocate it towards vehicles that can grow money while maintaining financial aid eligibility. It’s a step-by-step process, but “saving a dollar today is better than borrowing one tomorrow.”