Welcome to the Real World: Personal Finance Tips for New Grads
My daughter just graduated from college. Although she took several economics classes, she really doesn’t have a clue about handling her own money. How can I help her start out on the right foot?
— A Reader
Congratulations to you and your daughter! College graduation is a real milestone, but you’re wise to realize that your daughter’s education isn’t quite complete. The unfortunate reality is that most young adults have received little instruction about personal finance at the moment they need it most: when entering the workforce and starting “real life.”
To help your daughter start out with confidence — and hopefully avoid some very common mistakes — I’d begin with a few basics, both big-picture ideas and some very practical ones.
Live within your means
This is the big one that everyone needs to follow. If you can impress on your daughter the importance of budgeting her money (including some for savings), and sticking with a lifestyle she can afford, you’ll be doing her a great service. It will keep her out of debt, help her build wealth for the future, and — just as important — reduce her anxieties about money. An online monthly budget planner can be a great starting point.
Plan for retirement
Your daughter might think this is jumping the gun, but now is actually the ideal time for her to start saving for retirement. To catch her attention, tell her that if she can start putting away just 10 percent of her income toward this big goal now, she’ll probably never have to increase that percentage. If she’s at a job with a 401(k), at the very least she should contribute enough to get any company match. Otherwise, a Roth IRA is a smart move.
Prepare for the unexpected
Urge your daughter to start creating an emergency fund to cover three-to-six months of basic living expenses in case of illness or unemployment. Even if she knows that she can count on you to be a safety net, having her own nest egg will give her a greater sense of independence.
Have health insurance
This is a must — even for the healthiest 20-something. A bad accident or an unforeseen illness could be ruinously expensive (for both you and her). If your daughter can get health insurance through work, perfect. If not, she should be able to stay on your policy as a dependent provided she’s single and under 26. If she can’t be covered under your policy and doesn’t have a job that offers healthcare benefits, shop around and find a high deductible policy. It should be relatively inexpensive for a healthy young person.
Start a banking relationship
Most college kids have checking accounts with ATM/debit cards attached, so they are familiar with how these work. If your daughter needs a new account, she should look for a no-fee or very low-fee account (some of the online banks offer debit/ATM cards and charge no fees). Make sure she understands the rules about overdrafts, particularly the fees associated with them.
She should also get a credit card and begin building her credit history. Again, a no-fee, low-interest card is best — but urge her not to carry a balance unless absolutely necessary. Explain how quickly compound interest adds up. And make sure she reads the fine print to understand interest rates and penalties for late or missed payments. For an extra lesson, a cost-of-debt calculator can be a real eye-opener!
Keep on top of student loans
If your daughter has student loans, they can quickly get out of hand if not tackled right away. Help her find out the repayment process and when repayment should begin. Like credit card debt, she should never become delinquent on a payment. Check out studentaid.ed.gov for more information on how best to repay student loans as well as loan forgiveness programs for certain types of work.
Learn about investing
As your daughter starts to save part of her paycheck, help her become acquainted with the basics of investing: types of investments (stocks, bonds, mutual funds, and exchange-traded funds), the concept of risk vs. reward, and the importance of diversification and asset allocation. To make these ideas real, you might help her select a couple of first investments (ideally, well-diversified mutual funds or ETFs), explaining how each can help her meet her goals. You could also have her meet with your own financial advisor to help her get started.
Helping your daughter understand these necessities and the importance of financial responsibility will get her started on the right path. But also talk about your own money values. Share with her how you set your priorities and make financial decisions. Then let her take control. It’s up to her to live within her means, to save for her retirement, and to make responsible choices. Of course, also let her know that you’ll always be there to help out with advice and know-how as she moves into this new and exciting time of life.
Looking for answers to your retirement questions? Check out Carrie’s new book, The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions.
This article originally appeared on Schwab.com. You can e-mail Carrie at [email protected], or click here for additional Ask Carrie columns. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.
COPYRIGHT 2015 CHARLES SCHWAB & CO., INC. (MEMBER SIPC.) (0615-4350)
- Budgeting and tracking your expenses will give you a firm grasp on how much money is coming in and where it’s going out. This can help you cut wasteful spending and free up more of your income.
- Over 75 percent of Americans don’t have enough in savings to cover their bills for six months, and 25 percent have no savings at all. Becoming a smart saver will help you create a strong savings plan to be ready for an emergency or rainy day.
Source: Federal Reserve, US Census Bureau, Internal Revenue Service
- Most of us have 401(k) retirement or similar defined contribution plans, but don’t quite understand how to properly take advantage of all they can offer. By becoming financially savvy, you will be able to take control of your 401(k)/defined contribution plan and maximize your benefits.
- Today there are more ways to get into debt than ever before. Many of us start straight out of school with student loans, credit card debt and more. Financial education programs can teach you how to spot debt pitfalls and ways to get out from under any amount of debt.
- Over 40 percent of Americans are not saving for retirement, but it’s not too late. You can figure out the best way to save for retirement and create a plan to reach your goal. A good rule of thumb is to set aside 10 percent of your wages for retirement.
Source: Federal Reserve, US Census Bureau, Internal Revenue Service
- How would you feel if you didn’t have to worry about money issues or retirement? Financial security alleviates one of the most stressful issues in our lives and helps build confidence for the future.
- The recipe for success is investing in solid companies and holding on to them for the long haul. Top investor Warren Buffet tells investors how taking a long-term view can benefit your portfolio with Coca-Cola: “If you had invested $40 in Coca-Cola stock in 1919 it would be worth over $10 million today.” So don’t try to play the market and run the risk of buying high and selling low. Make thoughtful choices and stay calm through short-term market upturns and downturns.
- One of the most important things you can teach your children is how to handle their finances wisely. Start them off on the right foot and make them smart savers!