OCTOBER IS AN IMPORTANT month for college-bound teens. It’s when the Free Application for Federal Student Aid, better known as the FAFSA, becomes available for the 2018-19 school year. This form is used by colleges and universities across the nation to qualify students for scholarships, grants and loans. Dependent students will need to include their parents’ financial information, which means families may have no choice but to talk about money.
However, those discussions should be happening well before it’s time to complete the FAFSA, says Scot Landborg, partner and senior wealth advisor with financial firm Sterling Wealth Partners in Tustin, California. Landborg, who also hosts the podcast “Retire Eyes Wide Open,” believes money conversations should start early and build slowly. Young children can be told about how to balance spending, saving and giving, while teens should feel comfortable asking more specific questions of their parents. “You need to have money be an OK topic to discuss,” Landborg says.
However, if you’ve been avoiding money conversations for years, completing the FAFSA with your teen can be a good way to finally begin these important discussions. “Use that shared experience as a jumping-off point,” says Stuart Ritter, senior financial planner with advisory firm T. Rowe Price in Baltimore.
Here are the basic finance principles experts suggest sharing with your kids, as well the benefits and pitfalls of going into specific numbers.
Remember: Lessons are more important than figures. Money conversations with kids should focus on underlying habits rather than dollars and cents. It may be more important for teens to know how their parents saved money for college than to know how much they saved for college.
“The message is more about conveying the sacrifices being made,” says Mike McGrath, a certified financial planner and vice president of financial firm EP Wealth Advisors in Valencia, California. The idea isn’t for parents to pat themselves on the back as much as to let kids know that their college education comes at a cost beyond tuition.
Teens also need to have financial conversations with parents so they are prepared to live independently. “Once you’re in college, you’re pretty much on your own,” says Jennifer Kim, senior partner with financial firm Signature Estate & Investment Advisors, LLC in Los Angeles.
Young adults need to understand how to budget their money and perform basic money-management tasks, such as opening a bank account or deciding if and when to use credit cards. If their parents have never discussed finances with them, it may be difficult to navigate this new part of their lives.
Share specifics. While having general discussions about money management is helpful, parents should also be open with some specific numbers, such as their income. Landborg suggests thinking of it this way: “If they don’t have any idea what you’re making, how are they supposed to make a decision about their career path?”
Students may think twice about taking on significant student loan debt if they discover they can only earn a modest income in their chosen occupation. Sharing specific income numbers can also help provide perspective. Parents with meager bank accounts may be hesitant to let their children know about their situation, but being open and honest can help children adjust expectations and learn from past mistakes.
Teens also need to understand that parents may have taken decades to achieve their current financial situation. “One of the mistakes a lot of students make is they try to replicate the lifestyle of their parents,” Ritter says.
Young adults should know that incomes out of college will not be the same as midcareer professionals. Parents can help drive that lesson home by being upfront about sacrifices and decisions made over the years that helped them reach their financial goals.
The benefits and downsides. Sharing specific financial information with children can have downsides, such as emotionally immature teens sharing those details with others. Another risk is that children in wealthy families may lose motivation to become successful themselves. “You don’t want the child secretly thinking they won’t work so much because they are going to live off their inheritance,” Kim says.
However, in most cases, the benefits outweigh any negatives. McGrath says sharing information can open lines of communication between parents and children and inspire trust. “It’s a good opportunity to build relationships,” he says.
What’s more, it eliminates the possibility of children making up their own details about your financial situation. “Your kids are drawing conclusions,” Ritter says. “If you’re not talking to them, you are missing the opportunity to offer context.” In that case, teens and young adults may make their own assumptions about how you make, spend and manage your money.
Keep in mind, completing the FAFSA isn’t your only chance to discuss your finances with your child, but it is a perfect opportunity to open the conversation. Don’t squander it.