One of the topics we cover with clients when discussing their overall Financial Plan is making sure they talk to their children about family financial issues that could impact them at some point in their life (i.e. insurance, estate, investments, etc.). While it isn’t necessary for them to know account balances, it is important for them to know where to go or find important information in the event of an emergency.
There are also times when you will want to be sure you speak to your children about their own financial decisions. Especially at key moments, such as their graduation from college. While their focus is almost certainly on finding employment – there are several topics where you may be able to add considerable value through sound financial advice.
Even though you may have achieved financial security and solid net worth, your new graduate is just beginning their journey as an ‘Emerging Wealth’ individual and can most likely use some advice when it comes to their personal finances and spending. Issues that may now seem obvious to you are brand new considerations for someone starting out.
I’ve outlined five financial topics that I believe every new graduate should be thinking of:
1. Goal setting
Setting some basic goals now will ultimately guide their financial decisions and how they will allocate potential savings to their life plan. I break this down into some basic questions:
What do they want?
How much will it cost?
How do they prioritize each of these goals?
What is the timeframe?
Do they want to be able to afford an apartment or buy their first home? What is the cost of this new expense or purchase? Is the expense or purchase a priority or on a wish list? And what is the timeframe to meet these goals (immediate, short-term or long-term)? All important considerations when setting goals and prioritizing their next stage in life.
Once employed, they’ll need to understand all the items being withheld such as taxes, health insurance premiums and 401(k) contributions to name a few. Once they determine their “net” pay, they should begin tracking their expenses over the next three to six months (especially once student loan debt is out of the grace period) to see if they can create a budget. It is important to know what and when each loan amount is due. Mastering cash flow takes time but it is one of the most valuable early lessons of financial management.
3. Reduce debt load as quickly as possible
If they have college loans, it is time to reframe the way they think about debt. Ken Ilgunas, author of Walden on Wheels: On the Open Road from Debt to Freedom says, “Don’t think of your debt as a monthly bill, think of it as a sworn enemy. You need to hate your debt”. Review interest rates along with balances to help them put a plan together that tackles debt. A great place to start is by paying off the high interest rates first. Some carriers offer a reduced interest rate if payments are automatically debited and is something to consider.
4. Take advantage of employer’s 401(k) or similar retirement plan
The value of compounding is striking when contributions are made early in one’s career. Contributions, deducted from their paycheck automatically, are tax-deductible and that money grows tax-deferred until they take it out, ideally in retirement. As soon as they are able, they should invest enough in their 401(k) to qualify for the full employer match. Why refuse free money?
5. Steer clear of new debt.
Debt can be a dream killer. If they’re not saddled by debt payments, they’ll be more nimble and able to pursue a wider array of career opportunities. According to Student Loan Hero, the average Class of 2016 graduate has $37,172 in student loan debt, up six percent from the previous year. Putting purchases on credit card, treating oneself to a high-ticket item, buying a new car and so forth can be very tempting given this new steady income. However, so can the ease of opening credit cards and carrying a balance. Steering clear of the temptation and maintaining self-discipline is worth discussing before they are officially on their own and no longer under your radar.
Helping your new graduate take the reins of their own personal finances after graduation can set them up to tackle real world financial issues with ease and make life easier. And, it provides peace of mind to both of you.
Steve Kohler is Managing Director of DBR Advisory Services at D. B. Root & Company, a Pittsburgh-based wealth management firm. If you would like to contact Steve please e-mail him at email@example.com or call 412-227-2800. Read bio…
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