Four Financial Topics to Discuss with Your New College Graduate
Graduating college is a huge turning point for young people – life changes after college. It’s time to enter the work force, and to launch your career. While it’s of course an exciting time, college graduates also tend to face some challenges when it comes to this big transition. Some of the biggest challenges are around personal finances – especially if the grad was financially supported by their parents throughout college. After all, personal money management isn’t usually taught in school.
If you have a son or daughter who recently graduated from college, it’s important to have the “money talk” to arm them with the basics of personal money management as they enter the first stages of their adult lives. Many parents have talked to their kids about money from early on, but for many other families, talking about money can be awkward and difficult. But either way, college graduation is a great time to either revisit or broach the subject of personal finance. The money lessons you impart to your son or daughter now could pay a lifetime of dividends in the form of wise management of their personal finances in the future.
I’m an amateur personal finance geek.
Your tools have helped me become a smarter investor.
Personal Capital Dashboard User, February 2021
What Should You Talk About?
So, what specific areas of personal finance should you talk to your recent college grad about?
Here are four areas you might want to cover to set them up for successful and confident money management:
Learning how to create and live on a budget is one of the first things young adults need to grasp. Without a budget, it’s easy for anyone to lose track of their spending and suddenly find themselves in financial trouble soon after bolting out of the financial starting gates.
You can help your son or daughter create a simple budget by writing down all of his or her recurring monthly expenses. These include things like rent or mortgage, insurance, utilities, cell phone, car payment and groceries. Also help them come up with a good number for a monthly allowance for incidentals like entertainment and eating out.
If after adding everything up, you realize there is a deficit, you can advise your grad to look for ways to cut expenses. For example, maybe they need to find a less expensive place to live, drive a less expensive car, or cut back on entertainment. If there is a surplus, discuss how this money can be saved, invested or used to pay down debt.
2. Managing Debt
Excessive debt is an albatross that can hang around your son or daughter’s neck and keep him or her from achieving important financial goals. Unfortunately, easy access to credit, even for recent college grads without a strong credit history, sometimes tempts young adults to take on more debt than they can handle early in their lives.
If your college grad has taken out student loans to help pay for college, help them create a repayment schedule to pay off the loans as soon as possible. This will reduce the interest expense paid and free up money that they can use for more productive purposes, such as saving and investing for retirement.
You might also want to talk to your son or daughter about the potential dangers of not managing debt wisely and the high cost of racking up large volumes of credit card and other high-interest forms of debt. Credit cards can be a useful financial tool if the balance is paid in full every month, but if your college grad starts making minimum payments only, they can fall into a debt trap that’s sometimes hard to escape.
3. Saving and Investing
Recent college grads have at least one big thing working in their favor financially: time. By building solid saving and investing habits early in adulthood, your son or daughter may be able to capitalize on compounding returns over the long term.
One of the first financial goals for many young adults is to build an emergency savings fund to cover unexpected expenses like car or home repairs or out-of-pocket medical costs. For example, your son or daughter could start by putting $100 a month into a high-yield account or money market account that can easily be tapped to pay for emergency expenses.
On the investing side, encourage your son or daughter to participate in a retirement savings plan at work (like a 401k plan) or open an Individual Retirement Account (IRA). Saving for retirement might not seem like a high priority for a young adult, but it’s never too early. With up to 40 years or longer until retirement, your college grad could benefit tremendously from long-term compounding of returns by starting early. You might also want to connect your son or daughter to your financial advisor, so they can ask questions about building a portfolio and investing early in their careers.
4. Building Strong Credit
Your son or daughter’s credit rating will impact virtually every area of their financial life, including buying a home or car, renting an apartment and possibly even getting a job. So, it’s critical that your recent college grad get off on the right foot from a credit standpoint.
If your son or daughter doesn’t yet have a credit card yet, now is the time to apply for one. Again, stress the importance of paying the balance in full and on time every month to avoid paying high interest charges and late fees. Also emphasize the importance of paying all bills on time. This is one of the most important factors considered by the credit rating agencies in assigning personal credit scores.
Our Take: Teach the Basics
Unfortunately, most universities don’t offer a course in “Financial Management 101.” So, it’s often up to parents to teach new college graduates personal financial management basics like these.
Plan to sit down with your recent college graduate soon to talk about these and other important financial topics. Talking about money can be difficult, but as a parent, this is an important conversation to have with your adult child as they face this major life transition.