Students planning on starting university this year have faced more challenges than usual thanks to Covid-19. Yet, come September, thousands will still be heading off to university and, for some, that will mean independence for the first time.
Questions remain over how universities will tackle social distancing restrictions when it comes to lectures, seminars and accessing resources like the library. However, if your child or grandchild is moving away from home to attend university, they’ll need to take control of their finances no matter how courses are structured. If they haven’t had to pay things like rent or manage day-to-day outgoings before, it can be a steep learning curve.
It’s not surprising that taking control of finances can be a daunting prospect. In fact, 79% of students worry about making ends meet. In line with this, 77% stated they wish they’d had a better financial education before starting university. Luckily, there are some things you can teach them to help them manage their finances better as they strike out on their own.
First, is how to put together a budget and why it’s important.
For many first-year students, university life will be the first time they have to handle bills and all their day-to-day expenses. A budget can help keep them on track. It’s particularly important because of how student loans and grants are paid. Students will receive a lump sum at the start of each term, as a result, the money needs to last several months before the next instalment arrives.
Suddenly having a large amount in your account, certainly makes it tempting to splash the cash. However, it’s a step that could leave them short for the rest of the term. Going through what they’ll need to pay for each week or month can help manage how their income is spent, there may be some expenses they hadn’t previously considered too. Taking out one-off costs and committed spending can help create a weekly disposable income that they can enjoy.
The good news is that student accommodation is often paid termly too and includes bills, so you don’t have to worry about them missing rent payments.
Most modern banking apps come with easy to create savings pots and budgeting tools which can be used to create and manage budgets and some even send alerts with how much money you have left in your budget as your spend.
Budgeting is about minimising what your spend. Instead think of a budget as giving you permission to spend without guilt or regret.
Student overdrafts are incredibly popular. These are typically interest-free while the student is still in education. Often the limit will increase each term or academic year. For instance, starting at £1,000 and reaching £3,000 in their third year. Some accounts will come with additional freebies that can be valuable, such as a free railcard.
An overdraft can be a useful way to manage finances throughout university. However, research from the Money Advice Service suggests it’s still an area where students could benefit from some guidance. Four in ten admitted they had gone over their overdraft limit or used an authorised overdraft, potentially leaving them facing hefty penalties.
With an overdraft, it can be easy to see the funds available as free money, rather than a source to fall back on occasionally. Managing an overdraft effectively goes back to budgeting.
It’s also important to look ahead to after they graduate, and interest starts being added to the overdraft. Keeping in mind that it will need to be paid back at some point can help students rein in their spending on non-essential items.
Some banks will offer an extended 0% interest period, where the overdraft limit will gradually reduce, helping new graduates slowly pay back what they owe. When opening a student account, it’s worth seeing if this is offered and what the eventual interest rate could be as a result.
In addition to overdrafts, students may find they’re offered a credit card for the first time too.
The good news is that not many students would turn to a credit card if they needed money. However, for the 14% that would, it’s important they understand how a credit card works and the potential negative effects to consider. Forgetting to make a payment or spending more than they can afford to pay back could leave them struggling financially for years to come.
The Money Advice Service research found that in 2018, 176,000 students had fallen back on, or missed payments on bills or credit cards for three months or more. It’s a mistake that could harm their credit rating, making securing loans, a mortgage, or other forms of credit far harder in the future.
Having an honest conversation about credit card interest rates and what a credit score means for their future, can help students understand why alternatives may be a better solution for them. Of course, there are times when a credit card is useful, but having a plan to pay it back is essential too.
Supporting students through university
There are plenty more financial lessons to pass on to young adults before they head to university and after they graduate. Making it clear you’re there to talk about financial concerns they may have and offer advice when they need it, can help create a positive attitude towards their finances.
Completing a degree can be expensive and you may want to offer financial support to your child along the way. Whether you hope to provide regular financial support or cover one-off costs, we’re here to help. From understanding what’s affordable to which assets are most appropriate to use, please contact us to discuss how you can help children or grandchildren as they head off to university.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Jon Doyle is Founder and Financial Planner at Juniper Wealth Management. Advising clients since 2008 he has guided clients through good time, bad times and the ugly. With a clear vision on how advice should be delivered and strong opinions on how we should be investing money in order to live the life we want to live free from money worry.