In a few weeks you may find yourself at your child's College Graduation. For some it may have been an easy 4 years. For others it may have been a more elongated ride with a few bumps along the way. No matter your graduate's story they now find themselves in the enviable position of entering the real world with endless opportunity. While they may be relegated to celebration and searching for that first job getting off on the right foot financially is equally important which is where you can significantly help them with just a few pointers.
1. Set Up a Budget
- Budgeting is never fun but is necessary to ensure your graduate is not spending more than they are making. Have them go through the 50/20/30 budgeting exercise where they list out all their fixed bills and ensure they equate to less than 50% of their net income. Next have them put away the 20% for financial goals to a separate savings account. Lastly, have the 30% or what's leftover be for fun money or discretionary expenses. Doing this early will ensure they have the proper financial foundation as they begin to make more money.
2. Start Contributing to a Roth IRA/401(K)
- The 8th wonder of the world, compound interest is unbeaten. What makes it even better is when the money compounds on a tax-free basis. That's what happens when you contribute to either a Roth IRA or a Roth 401(K). As an example, if your child was 22 and funded $6,000 into their Roth over a 19-year period and assumed a 8% average rate of return by the time they are 60 they would have almost $1.2M total of which over $1M would be tax free growth that they would never have to pay Uncle Sam on. More importantly get your child contributing to a Roth IRA or Roth 401(K) ASAP.
3. Build Up a Cash Reserve
- A cash reserve is not sexy, but it's a lot better than credit card debt which is what can happen to your child if they are not careful, and something unexpected happens. You may be willing to help initially, but if you can teach them to plan accordingly for life's uncertainties it will ensure they don't wind up with credit card debt which can significantly impact their financial position long-term. 3-6 months of living expenses is a good rule of thumb to start with.
4. Get a Gameplan for those Student Loans
- Yes, those pesky student loans they didn't think about while they were in school. They may be pushing back the moratorium again, but it's not a good idea to plan like that will be the case forever. Due to that you need to get a gameplan around paying them back and when you want to have them paid off by. Determine which loans to pay down additional principal on and begin a process of getting this taken care of. A great app to use which will help them is Changed which will round up change and apply it to their student loans.
5. Come Up with Financial Goals
- One of the biggest determining factors of one's financial success is their ability to set goals as well as plan for those goals. Get your recent graduate to begin thinking about when they may want to purchase a home, have their student loans paid off, meet their cash reserve limit, etc. Doing so will allow them to begin to get an idea for what they want their future to look like and how they can reach the goals they set.
Whether your child is a recent graduate or has been a graduate for a few years these tips will ensure they get on the right track. If you have questions about any of these tips or additional questions please contact your Private CFO.