Motivating your kids to save 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 putting money into a specific account for college savings is instrumental, not just for growing education funds but also learning healthy financial habits. Here are some great ways for parents to help their children learn to save!
Begin with financial literacy
It’s all about fundamentals: how to earn, spend, save and make money grow. Even with digital money and payment platforms becoming more common, financial literacy education begins with the basics. With young children, it’s important to explain how money is earned, the value of that money and how to save; by helping them put money into a piggy bank of youth savings account. As children mature it’s important to introduce budgets, checking accounts, debit cards, investments and different kinds of savings vehicles. The key is to have open conversations about personal finance so that kids learn early that it’s important to properly manage their money.
Learning about budgeting
Take the opportunity to teach children budgeting by recording basic expenses (like a grocery bill) 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 items. From there, a direct line to savings is generated and 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. Save a percentage of the gift and allow the rest to be spent! The real trick is that the savings are beginning early, allowing 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 jobs give the opportunity for students to earn money. Babysitting is typically a great job for high schoolers providing work flexibility and often a convenient location nearby. Jobs may also 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.
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 have a minimal impact on financial aid if they are set up correctly.
Money in a child’s name is counted as a student asset, as opposed to a parent financial asset, which could potentially reduce financial aid eligibility. This presents an unfortunate situation when it comes to college savings; parents want to encourage savings, but do not want to risk losing free financial aid money as a result.
To reduce the impact this savings could have on financial aid, parents should consider keeping their child’s college savings account in the parent’s name. The financial aid formula assumes that 20% of student savings are available to pay the college bill, but counts the same savings in the parent’s name (like a 529 Plan) at 5.64%.
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.”