$ Tips for Your Grown Kids
Early summer’s cap and gown now hang in the closet and you just hope your suddenly grown child is ready for real-world financial challenges, from debt to saving for a remote retirement. Now more than ever, you can teach your kid many key money lessons.
I was filled with mixed emotions last May when my oldest son David graduated from college. Four years ago I gave him advice on how to make his savings last four years, how to negotiate living with a roommate and how to do his own laundry. He did a good job with the first two but sort of missed the laundry lesson on separating brights from whites.
David graduated with a job. He worked hard, interviewed diligently and moved to Chicago to work for a regional bank. After four years at a college near home in Ohio, he’s five hours away and truly on his own.
My husband and I share the natural parental desire for David’s financial independence. First I told my son the same advice my father gave me: Live below your means and always fully pay off credit cards each month. If you can’t afford something today, save until you can.
I worked with David on a budget and his ability to assess needs versus wants. Arguably, today’s wired world brings more must-have expenses than when I started my first job: Cable, smartphones and Wi-Fi are nearly as essential to young professionals as a place to live – and can be expensive. Given these additional costs, he works to cut spending in such other areas as housing (sharing an apartment with two friends) and transportation (living close to the subway to avoid car and parking costs).
Controlling spending is first, saving second. Unfortunately, David is a millennial – the generation born in the 1980s and early 1990s, predicted to be the first in U.S. history less well-off than their parents. Slower future expansion of our economy means financial security for this generation will likely require more self-discipline – and aggressive saving – from the start of adult life.
The chart below illustrates the importance of starting to save early. In scenario 1, the young person saves $3,000 per year for nine years from ages 22 to 30 and then nothing more. The individual in scenario 2 waits until age 35 to start and then saves $3,000 a year for 26 years.
Due to more time to allow more opportunities for growth, the first one ends up with a considerably higher balance at 60 despite a much lower original investment ($27,000, compared with the second person’s $78,000).
Among other money pointers for young adults:
Pay yourself first. Take advantage of any employer match on a 401(k) or 403(b) (if you work for a school and tax-exempt organization). Never pass up free money.
Strike a balance between the present and the future. I recently talked with a young adult new to the work force who saved aggressively; he had so little disposable cash left each month that he felt unable to go out with friends for dinner or buy concert tickets.
We adjusted his retirement deferral from 8% to 6% but also included automatic increases of 1% per year to coincide with his annual raises. This allows him to save for his future without entirely sacrificing life in the present.
(One of my colleagues, who wrote an excellent piece about helping young adults transition to financial independence, recommends budgeting 50% of after-tax income on needs, 30% on wants and 20% on savings.)
We all hope our children become financially self-sufficient adults but occasionally we feel the need to help. We don’t want to keep our children on the family payroll indefinitely – and certainly don’t want to jeopardize our own retirement needs. But my husband and I decided that if our children ever do need assistance, we prefer helping them meet the 20% savings goal and contribute to a Roth individual retirement account rather than helping pay off interest-laden credit card balances.
As we send our oldest into the real world, we hope we set the groundwork for him to make responsible financial decisions. I leave him with a new Roth IRA, a clean check register and a big box of Shout Color Catcher sheets.
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