6 Money Lessons To Teach Your College Graduate
To say recent college graduates face financial challenges is an understatement. Many Millennials and Gen Z young adults grew up either experiencing the effects of the 2008 recession firsthand or watching their parents struggle through it. And now they’re launching out on their own, trying to figure out this complex financial world.
Here’s a snapshot of what these young adults are up against: they see the value of attending college for career preparation, but they’re unwilling to take on the student loan debt that previous generations did. They’re willing to work hard to save, but they know their lives may not look like their parents’ lives did at the same age. (1) They face high housing costs and increased costs of living, all while wages aren’t growing as quickly as they once did. (2)
As your children are graduating college and preparing to enter the “real world,” what financial lessons can you impart to help them overcome obstacles and help create the secure, independent future they long for?
1. Realistic Budgeting
Living within your means is easier said than done, but by teaching your kids how to budget, you give them a framework to make financial decisions and take ownership of their future. As young adults start their first full-time jobs and adjust to possibly living on their own or taking on more expenses, they need to learn how to look at the numbers and align their lifestyle with their income. This means ignoring society’s incessant messages that they need what everyone else has.
Setting a budget will help them stay on top of their debt, know where their money is going each month, and see how much they are saving. Without a budget, it’s easy to overspend on dinners out and underspend on credit card payments.
While the parameters of a budget depend on an individual’s specific situation and goals, you can get your child started by giving them tangible examples of what it costs to manage a household and help them map out how they will divide their money among essential expenses, savings, debt payments, and non-essentials.
2. Save As Much As You Can
As hard as it will be for your child to save money when they’re just starting out, encourage them to focus on the big picture and save every penny possible so they can harness the power of compound interest.
Consider this: If a 21-year-old opens a Roth IRA with $1,250 and contributes $100 a month, when they turn 65, they could have $366,000 (assuming a 7% annual return) saved. If that same person waits just 5 years to open an account and contributes the same amount, they would have $100,000 less when they reach 65.
Young adults can take advantage of their age and time horizon by maxing out their 401(k) employer match, funneling money from side hustles or bonuses into savings, and beefing up their emergency fund so they aren’t tempted to withdraw from their retirement account when unexpected expenses come their way.
3. Kill That Debt
Here’s the hard truth: Millennials carry more debt than any other generation in history—to the tune of $1 trillion. (3) And do you know what type of debt the majority of that amount represents? Student loans. Shockingly, Millennials with student loans spent an average of 9% of their pre-tax income paying off this debt…for 10 years! (4) And while Gen Z is much less willing to take on debt for college, it’s still a reality many graduates face. (5)
Since debt directly reduces the amount of money your child will have available to save, teach them how to handle debt responsibly and eliminate it aggressively by making extra payments and making sacrifices now to live debt-free sooner.
4. Leverage Technology
Young adults don’t know what life is like without technology, but that doesn’t mean they always use it to their advantage. Financial technology is booming and can help your kids streamline and optimize their financial life.
For example, the countless budgeting platforms out there can help your young adult track their money in real time and give them valuable awareness of their financial situation. Whether it’s signing up for Mint or Everydollar, saving extra by rounding up purchases through the Acorns app, or using any one of the other apps to capture your financial life in one spot, technology can reinforce good financial habits and motivate your child to make good choices.
Then encourage them to set up automatic payments for their bills and savings. Not only will this simplify their to-do lists, but it can also prevent them from accruing late fees, damaging their credit, or forgetting to save.
5. Use Credit Wisely
Credit cards aren’t inherently bad, but without guidance, you can’t expect your college graduate to know how to use them wisely. This generation of young adults grew up seeing their parents wave a plastic card and get goods in return. What they may not have seen is the hard work and discipline that goes into earning the money that eventually paid off that card. It’s not surprising, then, that 45% of college students have an average credit card debt of over $3,000. (6)
Teaching your kids about credit—both good and bad—will keep them from making financial mistakes that could haunt them for years or even decades. As their expenses multiply, help them manage their money prudently so they aren’t tempted to continue charging while hoping they’ll have more money to pay it off in the future.
6. Get Expert Advice
The good news is that 89% of Gen Zers admit that financial planning makes them feel empowered and 64% are already researching financial topics. (7) Do you know what will push them even further? Giving them the opportunity to work with a professional who can help them start out right and make the best choices for their situation.
We understand that it isn’t always easy teaching our children about money. As part of our services at SC Financial Services, Inc., we help our clients’ children by giving young adults a safe place to discuss their money questions and become more independent. Sometimes it is better to have a “friend of the family” help in this area. Contact us today at 480-214-9596 or info@scfinancialservices.com if this multi-generational approach is appealing to you.