Congratulations!! Your senior has graduated and will be entering ‘the real world’. Handling finances in the real world is very different than handling finances in high school. Once your child graduates, they need to make a plan for their future. For many students that can mean attending college full-time. For other students, it may mean entering the workforce.
After graduation most kids realize that life is not as lavish and care-free as it was while they were in school. Depending on their path, they will have a whole new set of expenses, and learning how to manage them may prove to be difficult. Unfortunately, many recent graduates lack the basic financial knowledge necessary to thrive post-graduation. Here are seven tips to help your child get on the road to financial success.
Make A Budget
When students get into the real world and begin to work, it may be tempting to buy things that they were never able to afford. And for full-time students, parents may give them a stipend that they need to manage to pay for their personal expenses.
One of the best things your child can do is to learn how to live within their means. This means making decisions and tradeoffs on their spending. The key to being financially stable starts with a budget.
Takeaway – Help your child create a simple budget. What will their monthly income be? What monthly expenses do they have? Income – expenses = NET. This NET should at least break even (ideally a surplus). If they are in a deficit, they either need to increase their income (getting a part-time job or job that pays more) or they need to cut their expenses.
Learn the Difference Between Wants and Needs
Learning the difference between wants and needs will be critical to their financial success. They need to make responsible choices and pay for necessary items (food, cell phone, transportation/housing costs, etc.), BEFORE spending on fun items.
Takeaway – Before they make any ‘fun’, large purchases help them think if they really need it, and if they do, are there any cheaper alternatives? Being able to distinguish needs from wants will help your child save money and become financially independent.
Be Careful with Credit
Credit cards are a BIG trap for young people. It feels like access to ‘free money’…until the statement comes. My oldest son got into trouble with credit early on. His excuse was that his purchases were all $10-$25. Once he saw how that added up on his first bill (over $1k!) he understood how quickly credit can get away from you.
A credit card provides convenience, but you have to be careful with your spending. It is VERY easy to rack up debt that will be difficult to pay off. If you have credit card balances, your credit score can be negatively impacted, which will reduce their chances of being approved on future financing for essentials like a renting an apartment.
Though there is the potential to fall into debt with excessive credit card usage, a credit card can provide many benefits if used responsibly. Here are some basic tips on how to use a credit card responsibly so they do not get in over their head in debt.
- Always pay bills on time: Late payments will not only result in additional fees, but also in a reduced credit score. Make it a plan to always pay your credit card bill on time, every time, and highly consider making more than just the minimum payment to avoid additional interest charges – ideally paying the balance in full each month.
- Don’t charge what you can’t afford now: If you can’t afford to pay for something, don’t use your credit card to purchase it. You should always base purchasing decisions on what you can afford now with your current income.
- Protect Your Credit: Make sure to check your credit card statements regularly to check for fraudulent activity. Only access your credit card account online using a secure network, and utilize a separate password for every online account you have, that way if one account gets compromised, your other accounts will remain safe from these dubious attempts.
- Be careful about opening too many cards: We all know recent graduates get bombarded with appealing credit card offers. Be careful not to apply for too many because every time you open a new account your credit score will take a hit. In addition, opening multiple credit card accounts may make it easier to fall into debt, and harder to manage your spending.
Takeaway – Help your child choose just one credit card to use that has no annual fee. Check in with them often to monitor their charges, balances and payments to ensure they are managing their debt responsibly.
Plan for The Unexpected
Emergencies happen, and they usually happen at the worst time possible. In addition, these emergencies could take quite a toll on their finances unless they have an emergency fund in place. This is difficult for young people starting out and they usually rely on their parents. But even having $500-$1000 saved in an emergency fund will help should they experience some sort of emergency.
Takeaway – Help your child establish a savings account that will be used for emergencies only.
Automate Savings
This applies to those graduates that are working either part- or full-time. One of the best ways to get ahead with your finances is to automate your savings. Help your child make a plan to set up automatic transfers or deposits into your savings account after each paycheck. This will make saving easier, faster, and more convenient. It can be as little as $25. Automating savings will ensure they don’t skip contributions and also help avoid making unnecessary purchases.
Takeaway – If your child has a job, help them set up an automatic savings plan. Start small so they can enjoy their hard-earned income too!
Look into Investment Options
For those that are going to work full-time, investing should be part of their future. The first step is always to get a solid emergency savings fund established. From there, opening a Roth IRA and funding it annually is a great way to start long term investment savings.
Takeaway – If your child has a job, help them set up a Roth IRA and begin contributions. You can also see if their employer offers a 401k, if they are eligible to participate and if they will receive an employer match.