Help Jumpstart your Recent Graduate’s Financial Independence
By Chaz Fahrner, CFP®, EA, MSBA
Whether you have a high school or college graduate starting their first job, a few basic financial words of wisdom can provide a solid foundation for future financial success. Meaningful conversations with a recent graduate about money can pay huge dividends for your child and yourself. The less monetary assistance you need to provide, the more you can save and keep for your own retirement goals. Here are three basic financial concepts that may help your recent graduate kick start their financial freedom.
Managing expenses and budgeting
It is important for your recent grad to understand that expenses and budgeting is a huge first step in maintaining a stress free financial life. An easy way to manage expenses and budget income is to help your child setup auto check deposit into their checking account, auto pay for monthly bills and automatic contributions for retirement accounts. The idea is to setup their paycheck to automatically contribute to their retirement accounts every pay period. With auto deposit, the remainder will automatically be deposited in their checking account. All bills will be paid automatically from their checking account the day after their paycheck is to be posted. This easy budgeting strategy flips traditional budgeting on its head because it does not require complicated spreadsheets or monthly budgeting meetings. If setup correctly and coordinated with the timing of your child’s paycheck, they will only see money that they are free to spend.
Paying off debt and keeping it off
Credit card companies have been known for targeting young adults and especially college graduates to start a habit of living beyond ones means. If this is not addressed early on it can be a huge mess in a short period of time. I often see young adults buy new cars they cannot afford, accumulate credit card debt and pay the minimum on student loans. These types of behaviors can create huge problems in the future, making it a challenge to create wealth and security. My philosophy is that if they cannot pay cash for what they want, then they should not buy it. If your recent grad has student loan debt then I recommend that they continue to live like a frugal student after graduating while paying off student debt. If they can do this, then when they are debt free, they can start to shift their focus on saving for retirement.
Saving for retirement
The days of secure pensions and guaranteed social security are long gone. Creating a large nest egg has become a necessity for the majority of our population. The only way to create this nest egg is to start as early as possible and contribute as often as possible. I recommend contributing a minimum of 20%, of income into a retirement plan. Depending on your child’s age and income level, it may make the most sense, and it often does at a young age, to contribute to a Roth 401(k) or a Roth IRA. These accounts may allow your child to take tax free distributions at retirement versus having to pay taxes on what you take out.
It has become more common for employers to automatically enroll employees into retirement accounts but not all employers have committed to this trend. It is so important to turn on automatic contributions from paychecks to retirement accounts as soon as your recent grad starts their first job. If they do not start early then is will be a challenge after they have become accustomed to a certain spending lifestyle. The notion is that if they start early they won’t even notice they are contributing to their retirement.
It might just take a few conversations with your recent graduate to positively impact their future and help them in a meaningful way, but can be well worth the effort. Keeping your child on the right track can not only help them but allow you to live out your life goals without big financial interruptions.