Teaching finances to your future college student: A budget worksheet for teenagers
By Joe Messinger, CFP®
March 5, 2016
Did you have an allowance when you were a kid? Maybe some change or a few dollars if you did your chores? Were you the kid who spent your allowance right away or did you save all your pennies toward some big goal? Some of those habits may have followed you to your adulthood. But now as the parent of a college-bound teenager, you and your teen are making plans and starting to think about the life beyond college.
They have never paid taxes, insurance, or had to repay a loan. The school of hard knocks is not how you want your child to learn personal finance. Teens need to understand budgeting and how the decisions they make now could have a huge impact on their future quality of life. We have some tools and ideas that can help.
Begin with the end in mind. Your future self will thank you. Even before setting foot on a single campus, a family needs to sit down and talk finances. Establishing a budget for college is critical. Following our 3-step process to graduate with less debt and using our College Pre-Approval™ Worksheet can be your guide to determining how much college you can afford–to include a reasonable student loan amount. This simple one page college-funding worksheet can help you visual how much money you will have available to pay for college.
Thinking about what your student’s post-graduation financial picture will look like is also an extremely important part of choosing a college. By looking at the post-graduation picture, you can back into how much college you can afford. Your student will not really have an accurate conception of postgraduate finances without an exercise like this, and we have a simple worksheet you can use.
Before you get started, be aware of these key components for the discussion:
1) What target career is your student thinking about? (Not sure what the target first career might be? Take a moment to watch this video from our friend, Beth Probst of At The Core.)
2) With that target career in mind, what is the average starting annual salary? (You can find that information at Salary.com.)
3) How much money will you need to take out in student loans? (We recommend only taking the $27,000 available from the Federal Direct Stafford Loans. But if your plan calls for additional private loans follow our rule of thumb; total student loan debt should never be more than your projected starting salary upon graduation.)
Please note our example today is intentionally basic. We always tell families to never rule a school out based on sticker price. It is all about your “NET COST” to attend the college. The out of pocket amount of money families will be expected to pay even at the same college will vary greatly based on their eligibility for both need based and merit based financial aid. That topic is covered in other posts.
For this worksheet today, let’s use these figures. Ohio State costs $25,631 per year for an in-state student. Four years will cost approximately $102,524 (assuming the cost does not rise from year to year—like we said, we’re keeping it simple). The parents have committed $50,000 from savings and cash flow to put towards college leaving $52,524 to be paid for by the student. For our example, we will assume that the entire $52,524 is taken out in student loans.
Taking all this information, you can begin with our budget worksheet.
Remember…this is a family activity. Your student won’t learn anything if you complete this worksheet for them so you and your student both need to be sitting at the table.
Back to what we were saying. Let’s take the anticipated salary for your student, and plug it into the worksheet. Say your student is going to be an accountant with an average starting salary of $47,488. For our purposes, lets use the nice round number of $48,000. We’ll assume they don’t have a spouse or additional income yet. So their monthly gross salary is $4,000. Your student is probably going “hey, that looks pretty good!” Let’s continue…
NEEDS vs WANTS
We move into the expenses your future grad will need to pay each month. The first group of expenses are non-negotiable. They must be paid. They include student loan payments, health insurance, retirement savings (not technically a “must be paid”, but we think it should be non-negotiable), credit card payments, and taxes.
The student loan payment item is the one we will play with to determine how much college you can afford. Changing this figure will affect your bottom line of course and will give you the base guideline you need when looking for a college. Using our Ohio State figures from above, we’ll use the total student loan amount of $52,524. A quick way to estimate a monthly amount is to plan on $100 per $10,000 in loans. This assumes you take the standard 10 year repayment plan. In this example, your grad will be paying around $525 per month. Now let’s subtract the $525 from $4,000, and we get $3,475…still good.
Continuing on…health insurance. The average annual single premium contribution for 2015 was $1,017 or $85 per month. Not too bad. We’re down to $3,390.
Next is retirement savings. Trying to figure out how much to save each month for retirement is difficult. Some will recommend 15%. Some say at least up to what your employer will match. If your employer will match up to 6% of your 401k contribution, then plan on 6%. So 6% of the annual salary we’re using is $2,880 or $240 per month.
You can point out to your student that 6% is just a starting point. As you get raises, increase your contribution by 1% each year. You will be saving 10% plus of your pay by the time you are 30. Again, your future self will thank you! $3,390 – $240 = $3,150.
Let’s skip credit card payments and assume your grad does not have any–a nice idea indeed! At this point in the conversation, you can discuss the impact of credit cards, their pluses and minuses, and sound thinking about them.
The next item on the worksheet are taxes. We are estimating 30% of your monthly salary will go to taxes. Let’s deduct annual 401k contributions and health insurance costs from the pre-tax annual salary ($48,000 – $1,017 – $2,880 = $44,103) to give us a better picture of our pre-tax annual income. 30% of this amount is $13,231 or $1,103 per month. Our $3,150 goes down to $2,047—darn those taxes. But we’re still looking good! We’ll use this figure as our adjusted monthly income.
We move now to the second column of the worksheet, the WANTS, which has expenses more within our control because they are based on our choices in life. Your future grad can play with these items. What kind of car do they want to drive? Do they have a dream city they may want to move to? What is the cost of living? How much will housing cost? Each of these items’ costs are based on approximate percentages of your gross salary, but these values can vary widely.
|Starting Monthly Income||$4,000|
|$$ for your NEEDS||-1,953|
|$$ Remaining For Other Living Expenses||$2,047|
|Other Insurance (5%)||-200|
|Additional retirement (10%)||-0|
|Emergency fund savings (10%)||-0|
|Total Other Living Expenses (WANTS)||-$2,600|
|What’s left for fun money?||-$553|
Well that can’t be? This plan leaves us short by $553 per month? We want teenagers to learn this lesson. You have to spend less than you earn and live within your means. Now you are forced to make budget cuts. But where? This is something families face each and everyday. Do we stop putting money into the 401(k) plan at work? Live with a roommate and reduce our rent? Extend the student loan payment schedule to 20 years instead of 10 to lower my monthly payment? Take the bus to work? Get rid of cable? These life decisions are the ones your teenagers are going to face one day.
One part of the American dream is going to college to better yourself and make a good living. But the ultimate goal and the reason we work so hard is the idea of financial freedom. If we let students start out their lives as indentured servants to their student loans, they will never be able to save additional money for retirement or save for an emergency rainy day fund. How will they ever save for a down payment on a home? Or start a family? We can teach our young adults that these are the goals for a sound financial plan.
Going back to the student loan item. We based this whole exercise on the choice of Ohio State with the $50,000+ in student loans. Think about how much more would be left over if we chose a college not as expensive (or on the flip side a college that was MORE expensive–YIKES). If a student could have started with half the amount of student loans, they would have half the amount of monthly payment.
This exercise is critical because it can put the future in terms students can understand like driving a reliable car, living in a nice neighborhood, having a fast high speed internet connection, etc. These things are often the things that they take for granted since they don’t pay for them. Tell them how much you pay for their cell phone and car insurance. They will begin to see the big picture. This exercise is an excellent way for your student to really see what their financial future can look like and how their choice of college can impact that future reality.
Worried you won’t find an excellent college that can fit your student’s financial future? Don’t worry. You can, and Capstone can help. We can help your student graduate on time with manageable student loan debt without robbing your retirement.
March 7, 2019