How Do You Raise Financially Competent Children? (Part 2 of 2)

Congratulations!   You’re thrilled that you are no longer paying for your children’s college education and feel they’ve spent the last four years excelling in rigorous coursework amongst other things.  However, are they prepared to handle their own finances? What can you do to help them get on the right track now?   Here are a few suggestions for parents to share with recent graduates entering the work-force:

  • Get organized:  Encourage your recent college graduate to get organized.  First, there’s the paperwork.  For most children, it is their first experience with bank statements, tax documents, pay stubs, health insurance claim forms, student loans, and renters insurance.   Suggest keeping a binder or going paperless by keeping a virtual record of everything.  Second, there are the bills to pay that they may not have dealt with in college (rent, electricity, water, cable, and cell).   Direct them how you keep track of your own monthly expenses, payments, and record each actionable item.  This may be stating the obvious, but talk to them about the ramifications of missed/late payments.  Is your child paying bills through an automatic debit or by check?
  • Keep a detailed budget:  Ask your child to track all their expenses for the next couple of months.  Every single outflow of cash or credit card purchase should be recorded in a spreadsheet.   They should categorize each line item into a “needs” category or a “wants” category.  At the end of each month, sit down with them and discuss.  They will find that just being aware of what they spend will help them exercise a great deal of control.
  • Knowledge is power:  There are some children who did not how to do their own laundry before college and similarly, there are some children who are not fully equipped with the basics of personal finance before they graduate college.  Each child will differ and it’s your job to make sure they do have these skills.  Don’t assume that they just know what to do.  While most colleges offer advanced econometrics, statistics, and investment portfolio management, most children do not end up taking a class on basic money skills.  In fact, the only way your child will probably be equipped with personal finance knowledge is if they take a financial planning courses which not all colleges offer. The best thing you can do is just sit down with your child and share with them what you know about personal finance and guide them to resources. These days, there are many online articles/blogs and books on personal finance.  The basics of budgeting, taxes, balancing a checkbook, and savings will go a long way.
  • Saving early:   It may be daunting for your child to think about saving for retirement or an emergency fund, especially if their first paycheck is small.  Educate them about the power of compounding.  If your child’s employee has a 401K program, they should be participating even if put aside a small amount each paycheck.   Guide them to save for an emergency fund that would cover all monetary needs for 3-4 months in the case of job loss or other unforeseen circumstances.
  • Living at Home:  If your child can live independently financially, encourage them do so.   Children who live at home can start to feel too comfortable depending on their parents.  Sit down with your child to assess.
  • Debt:  There are many young adults who find themselves with large amounts of credit card debt.  Emphasize that a credit card is a form of borrowing at astronomical rates if one doesn’t pay off their balance every month.  With a new job and new life, many young adults find themselves “needing” many news things like a car, furniture, work clothes, etc.  Talk to them about budgeting and about being sensible.
  • Graduate School:   I’ve seen many recent college graduates decide to go to graduate school to delay entering the workforce.  Have a serious conversation with your children about why they want to go to graduate school.  Do they have good reasons as to why they want to go back to school?
  • Learning from your mistakes:  Share mistakes that you’ve made with your children.  Oftentimes, the best way people learn is through others’ experiences and the desire to overcome those same obstacles.

 

About the author

Tom Orecchio, CFA, CFP®

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