Whether your high school graduate is getting ready to attend college in the fall or your recent college graduate is embarking on a career (and hopefully moving out!) it’s important for them to have the skills they need to manage their own money responsibly, especially if you’ve been doing it for them up until now. Here are some key starting points to put them on the road to greater financial independence.
Perhaps your child already understands the basics of budgeting from having to handle an allowance or wages from part-time jobs. But now that they may be living on their own, they may need to draft a "real world" budget, especially if they ultimately end up paying for rent and utilities. Here are some ways you can help your child plan and stick to a realistic budget:
- Help your child figure out what income they will receive and when it will be coming in.
- Make sure your child understands the difference between needs and wants. For instance, when considering expenses, point out that buying groceries is a need and eating out is a want. Your child should understand how important it is to cover the needs first.
- Show your child how to track expenses by saving receipts and keeping an expense log. Knowing where the money is going will help your child stay on track. Reallocation of resources may sometimes be necessary, but help your child understand that spending more in one area means spending less in another.
- Encourage your child to plan ahead for big expenses by setting aside money on a regular basis.
- Caution your child to monitor spending patterns to avoid excessive spending, and ask him or her to come to you for advice at the first sign of financial trouble.
You should also help your child understand that as their financial goals change, a budget must change to accommodate them. Still, your child's ultimate goal is to make sure that what goes out is always less than what comes in.
Managing their own bank accounts
You probably already opened a checking account for your child, perhaps as a joint account holder. Now is the time to let them start managing their account on their own. Or, if they're graduated from college, maybe it's time to close down your joint account and let them transfer the money to a bank of their choice under their own name.
Recommend that they look for accounts with no minimum balance and unlimited free checking, as well as a simple fee structure, online or smartphone access and overdraft protection.
Also encourage them to open a savings account where they can save any income that doesn't have to be put towards college or living expenses.
And regardless of whether they're entering their freshman year or starting their first job, emphasize the need for them to constantly monitor their account balances and keep accurate records, especially of ATM and debit card usage.
Managing credit wisely
Your college freshman may not be able to open a credit card on their own, so you may have to co-sign the application. This is at least will give you some level of control over their use of the card.
Your college graduate, however, will probably be able to open their own account. Used responsibly, a credit card can provide security for a financial security and help them build a good credit history.
However, all too often, younger credit card holders charge more than they can pay off, and find themselves wallowing in a whirlpool of debt. Making late payments or missing them altogether will damage their credit history to a point where it may be difficult for them down the road when they want to buy a home or even a new vehicle.
Here are some tips to help your child learn to use credit responsibly:
- Advise your child to get a credit card with a low credit limit to keep credit card balances down.
- Explain to your child that a credit card isn't an income supplement; what gets charged is what's owed (and then some, given the high interest rates). If your child continually has trouble meeting expenses, he or she should review and revise the budget instead of pulling out the plastic.
- Teach your child to review each credit card bill and make the payment by the due date. Otherwise, late fees may be charged, the interest rate may go up if the account falls 60 days past due, and your child's credit history (or yours, if you've cosigned) may be damaged.
- Make sure your child notifies the card issuer of any address changes so that he or she will continue to receive statements.
Saving for Retirement
When your child starts their first full-time job, chances are they’ll be spending most of their paycheck on living expenses. However, if their company offers a employer-sponsored retirement plan, strongly encourage them to start contributing as much as they possibly can, even if it’s only 1% or 2% of their paycheck. Any amount they contribute can put them on track toward building a formidable nest egg when they retire, especially if their employer makes matching contributions.
If they’re not sure what to invest in, they might want to consider choosing a target date fund that corresponds to the year they’re planning on retiring. These funds shift their allocations among stocks, bonds and cash over time, gradually reducing risk as the target year approaches.
Get expert guidance
If you’re like many parents, your children may not want to listen to you discuss financial matters (or any other “adult” issues) with them. In these situations, a professional mediator might help.
If you’re working with a financial advisor, they should be willing to meet with your child to discuss these and other financial matters—either with you in the room or on their own.
Joelle Spear is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. She offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. She can be reached at 508.598.1082 or email@example.com
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2022. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances.