Seven tips to prepare your graduate for their financial futureon June 10, 2013 @ 6:13 am (Updated: 7:37 am - 6/10/13 )
Hopefully you've been talking a bit about money even before they get to graduation, maybe they've had an allowance, even a part-time job. Now, it's time for them to put their budgeting skills to work, with a little help from mom and dad.
"Parents really want to focus on what the ultimate goal is, and that is that they want to position their kids to be financially independent. They don't want those kids coming back to live in the basement," says Aimée Huff, Senior Vice President of ICON Consulting in Bellevue.
Huff says while young adults may be tempted by offers to "build their credit," they really only need one small line of credit or a car loan to do that, not a credit card - where they can get thousands of dollars into debt.
She says it makes sense for some families to take out student loans to pay for college and even to give college students an allowance.
"But at the same time, you do want them to understand the value of money. So, sit down and look at the budget. What is it going to cost for a cell phone? What is going to cost for fuel for your car and insurance?" says Huff.
She recommends student loans be used as little as needed so students aren't left with a mountain of debt at their next graduation.
"They have this image that when they graduate they'll be making $40,000 or $50,000 a year, and that's a ton of money. But, the average graduate's coming out with over $20,000 in debt," says Huff.
Even with those frequent talks and advice on credit and budget, there's no guarantee your college student won't find themselves getting in a little over their head. So, do you bail them out?
"As a parent, you never want to watch your kid stumble and fall," says Huff. "I think it does not do the kids any favors to just bail them out, because it sets a precedent that there isn't a consequence for their actions."
Huff recommends sitting down with your son or daughter and creating a plan for what they'll do to tighten their belt and what you might do in return to help them pay off their debt. For example, she says you might offer to match them dollar-for-dollar on what they send to their creditors.
Once they've finally made it through college and they've got a professional job of their own, Huff says your job isn't over.
"They've got a lot of decisions to make. The biggest mistake we see is that kids do not sign up for that 401K right up front," says Huff.
She says it's a good idea to give them specific examples of exactly what that 401K can do for them. For example, if a 22-year-old puts away 10 percent of a $50,000 salary with a 5 percent company match, they can have $3.8 million at retirement. If they wait until they're 32 to start saving, that number falls by more than half to $1.5 million.
"When you're talking to a 22-year-old, retirement is so far out it's hard to even conceptualize," says Huff, "Really, it's about setting up your future self for success."
The other "must do" is living within their means and setting aside a rainy day fund right away. Huff says if a new grad waits until they're comfortable to start saving, they may never feel comfortable enough. But, if they start good financial habits right out of the gate, they will last a lifetime.
7 Tips for Preparing Your Kids Financially
1. Be proactive! - If you are not talking to your kids about money, who is? They watch what you do even more than they listen to what you say. Is your own financial house in order? Share your own past mistakes and what you learned, take a course together, sit down and help your child set a spending plan.
2. Save first, spend what is left - Live within your means! Regardless of income, it is unsustainable to spend more than you bring in. You are stealing from your future self, who will be required to pay that money back with interest.
3. Start saving early - By saving a minimum of 10 percent of your income from the start of your first job. Example: Starting at age 22, save 10 percent of $50k income, plus 5 percent employer match until age 65 at 9 percent average annual return = $3.85 million. Starting just 10 years later, you would only have $1.5 million at age 65. Starting at age 32, you would need to save more than 50 percent more to have the same ending value.
4. Use credit responsibly - As soon as your child turns 18, they will be inundated with offers for credit. It is very easy to fall into the 'debt trap.' This is tricky - you want them to build good credit. One low-limit or secured credit card that is paid in full each month or perhaps a car loan can accomplish this.
5. The Rule of 72 - How long does it take to double your money? For example, if you earn a 6 percent annual rate of return, the rule of thumb is that it will take 12 years to double your money. At 2 percent, 36 years; and at 9 percent, it would take roughly 8 years.
6. Learn the basics of investing - What is a stock, bond, mutual fund, etc. What factors make them go up and down? Have a diversified mix of investments, that behave differently in different market environments.
7. Understand your employer benefits - A 22 year old earning $50,000, increasing at 4 percent per year, will earn $5.5 million by age 65. What can you do to help that income grow even larger? Are you taking advantage of a retirement savings match? What other benefits should you be utilizing?
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