Financial Lessons For The Soon-To-Be College Grad
Graduation is once again upon us and soon someone you know such as a son, daughter, sister, brother, niece, or nephew (perhaps even yourself!), will be venturing into the “real world” where big financial decisions will need to be made. Important ones. Ones that could affect them for the rest of their lives (good or bad). It is important to ensure they know some basic financial concepts and the ability to manage and understand money and credit.
Below are some key subjects all college graduates should know before they become independent adults. Subjects that are, unfortunately, rarely taught in schools, universities, or even at home. Many times the lessons we learn at home are based on observation or how our parents or grandparents handled, talked (or didn’t talk) about money. The following are some crucial areas to focus on as they become building blocks for a strong financial future.
1. How to Establish and Use Credit Responsibly.
How many people have gotten themselves into credit card debt and regretted it? I would venture to guess everyone. No one likes high interest debt and it can take years to dig yourself out if you continue to charge and only pay the minimum. None of us want our loved ones to be in that situation. However, one of the easiest ways to establish credit is to get a credit card. The initial balance is usually pretty low. Put together a basic budget. Then, explain that the card must be paid off every month. Setting up auto pay to pay the statement balance is easy and begins a track record of good credit. This will provide a good lesson on using debt responsibility. Then in the future, they can enjoy the best loan terms when they purchase a car or a home someday, and as a bonus, they won’t need a co-signer! See: You.
2. Save For a Rainy Day.
Emergencies happen. The car breaks down. We lose a job. There’s an unexpected medical bill. Survey after survey has shown that less than half of Americans would be able to cover a $1,000 emergency expense. That may seem like a lot of money to a college grad, but they will soon realize that $1,000 does not go very far. Automation is the easiest and fastest way to build wealth and also ensures that they don’t spend it first. Start small, but start with something. The goal is to have 6 months of expenses saved. Add up the cost of rent, utilities, food, transportation, debt payments and all the “non-negotiables” each month and multiply by 6. This is the amount of money they should have in a liquid, high interest savings account. It is critical to explain that this money is only to be used in emergencies. Buckets of money can be used for other goals, but start with the emergency fund first.
3. Save For When You’re Old.
It happens quickly and it’s difficult to conceptualize retirement when you are just starting out. I understand and I think we have all been there. But, how many times have you regretted not saving more money when you were younger, particularly in your 20’s? Compound interest is an amazing concept and it has worked the same way since the beginning of time. The younger you start, the less you will need to save later (if you choose). Again, start small, but start with something. Also, ensure the new employer offers a retirement plan with a match. This is a basic benefit that should be afforded all employees. Contributing enough for the match may be good enough for now. It is an instant 100% return on investment and who doesn’t like free money?! And again, if they don’t see it, they can’t spend it on something frivolous.
4. Don’t Compare Yourself to Others.
Speaking of frivolous, do you have friends or acquaintances who drive expensive cars, live in oversized homes, and dine at fancy restaurants, but you have no idea how they can afford it? Truth is, they probably can’t and they are in debt up to their eyeballs. Teach your grad to try not to compare themselves to others. This leads to unnecessary spending and anxiety when they think they need to keep up with other people. Everyone is on a different path and being able to delay gratification will be a key wealth builder.
While I didn’t discuss the “elephant in the room”, student loans, I realize they can play a significant role in a recent grad’s life and will affect or delay many decisions, including moving out of the parent’s house. But, perhaps this is a good time to discuss the important financial lessons I outlined above? Think about your experience when you graduated and what you wish you would have known before venturing off on your own. I bet some of these come to mind! The best gift you can give a college grad is knowledge. Take some time to talk about finances. And if you have younger children, talk to them too! The earlier we start instilling these lessons, the easier their future lives will be.
If this seems daunting or you do not feel they will listen to you, I would be happy to teach these lessons. I offer hourly services for these types of situations.