A new wave of college graduates were introduced to the “real world” last month. The good news is that according to the National Association of College and Employers, employers are expecting to hire 19% more recent college graduates this year than last. The bad news is that college graduates come out of college with an average of $24,000 in student debt (Source: MONEY Magazine). And that doesn’t even take into account the credit card debt that is run up over the 4 or 5 years while they are away from home. If one of these grads is your son/daughter, you may be wondering what financial advice you can give them – if they’re willing to listen! Below are some areas that I’ve identified as important for parents to be talking to their kids about.
Create a spending plan – This sounds really obvious, but you’d be surprised at the number of 20-somethings who aren’t tracking their spending and are living paycheck to paycheck hoping not to bounce any checks. The easiest solution for this is to create a spending plan using a Microsoft Excel spreadsheet. Here is a link to the spreadsheet that I created when I moved into my own home for the first time. I still use the spreadsheet today for tracking my spending, and recommend my clients use it as well. Once your son/daughter has an idea of what their estimated bills are each month (rent, insurance, car payment, cable/internet, cell phone, etc.), then they can start to figure out how much money they have available for eating out, going to movies, etc.
Start paying off debt – Almost every college grad I come across is only paying the minimum amount on their student loans, credit cards, auto loan, etc. The problem isn’t always that the money isn’t there. Some grads are able to land jobs that easily cover their expenses, especially if they’ve decided to live at home for another year or two. If the parents are willing, my advice is to allow your son/daughter to move back into your house while they pay off their debt. Of course this only works if they are committed to paying off their debt instead of going out with friends every night of the week. Most people find it useful to see their debt consolidated onto one piece of paper, with information such as the balance due, the interest owed, and the minimum payment required. I recommend my clients use a Microsoft Excel spreadsheet similar to this one to create their ‘Debt Snowball’ tracking form. For more information about what the Debt Snowball is, and how it works, see my previous blog here.
Create an emergency fund – I think this is one of the hardest things for college grads to grasp. Why would anyone want to have a $1,000 sitting in a savings account for an emergency when they have a bunch of outstanding debt? The reason is pretty simple. When you’re paying off debt, the worst thing you can do is to have an unexpected expense come up and to add more money to your debt owed. As a starting point, most “emergencies” can be covered with a $1,000 since most insurance deductibles fall under or at that amount. If a car repair is needed, or a hail storm hits, the emergency fund can be tapped instead of having to charge the expense to a credit card. Once debt-free, then increase the emergency fund to cover 3-6 months of expenses to help during extended periods of hardship such as being laid-off from a job.
Start saving for retirement – Most grads don’t immediately start thinking about saving for retirement. However, there are plenty of illustrations that show how much more you can have saved at retirement if you start at the age of 22 versus waiting until your 30. Everyone should be contributing at least the amount required to receive the employer match. If there is still excess available for retirement savings after that, I recommend starting a Roth IRA. Chances are the grad will be making less money in their first job than they will be 20 years from now. Combined with the fact that it looks like income tax rates will have to increase to pay for the country’s debt, it’s a no brainer for them to pay the taxes on the contributions now, and then receive the earnings tax-free when they pull the funds out in retirement. If they need advice for how to invest their money, fee-only financial planners are able to charge an hourly rate to provide a recommendation to get them started on the right path.
Ultimately, your son/daughter will need to mature and realize what it takes to have financial freedom and live the life they became accustomed to under your roof. Most of the ideas I’ve given above should actually already be learned behaviors before they even step foot onto a college campus and I encourage families to have these discussions starting in middle school. American Express recently reported that 57% of 20-somethings are still being supported by family. As parents, it’s our responsibility to teach our kids financial wisdom so that they are positioned to succeed in life.
Do you have a college grad who could use some guidance or an outside influence beyond his/her parents? Call me to schedule a free consultation – 913.693.7918.
John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit https://www.chladekwealth.com.