When my daughter was a year out of college, juggling two jobs and a handful of freelance gigs, I asked her for an income estimate to give our tax advisor. She said, “Sure. Let me check my spreadsheet.” A spreadsheet! I was so proud. It seems she had been paying attention all those times I talked to her about money. She was budgeting carefully, balancing her income with her expenses, and saving as much as she could. Sure, I was still paying her car insurance, and she knew she could rely on me as a safety net, but she was determined to maintain healthy finances.
My daughter has seen friends get into trouble because they didn’t understand financial basics. She always seemed to be more careful about her decisions. It’s not that we ever sat down for a big money talk. I just found places for little lessons along the way.
Start talking about money early
As soon as my daughter understood the concept of money, I gave her a small weekly allowance. Even though there are now kid-oriented money apps, I would still give young children physical currency. Concepts like saving and spending are more tangible when they can watch their piggy bank fill up. (Also, it’s very cute to see a child hand over a pile of cash at the toy store).
To keep things simple in the early years, I didn’t tie allowance to chores or school accomplishments. I told my daughter that I was giving her money so she would learn how to use it. And, if she wanted Pokémon cards or collectable plastic bracelets, I would be deaf to her pleas. She’d have to use her own money.
A few years later, I opened a custodial savings account at the credit union. That way my daughter could check her account online and learn about interest. It also became a great place to stash cash gifts from the grandparents. Those early lessons helped make the point that conscious spending and saving make more money available for bigger dreams.
Every lesson about money should be age appropriate. You might need to wait until a child can understand the connection between work and pay before you have them earn an allowance with chores. I know a kid who felt like his mom was cheating him because he wasn’t getting paid immediately for scooping the cat litter—she was paying him every Friday like a payday. This was too much for the boy’s developmental level, so the mom adjusted the plan.
Out of the nest, but still under your wing
Even after kids set out on their own, they can benefit from your financial advice. There’s no need to learn from big mistakes or wait for a calamity. Here are four tips that will help young adults on their way to solid financial footing:
- Start building an emergency fund. Arrivity financial planners recommend having three to six months of living expenses in an accessible account to pay for an emergency like a car repair or layoff. The larger the cushion, the more flexible one can be in responding to the unexpected without tapping credit.
- Get the most out of an employer’s 401(k). Young adults often feel cash strapped, but if they’re not contributing enough to get a full match from their employer’s retirement plan, they’re leaving money on the table. Show them that starting to invest early will provide more options later in life.
- Open a Roth IRA while their income is still low enough to qualify. Roth IRAs are funded with after-tax dollars, meaning qualified withdrawals in retirement are entirely tax-free. For a 20-something earning a modest starting salary, the math is compelling: Pay taxes now at a low rate, let the money grow for several decades, and withdraw it tax-free in retirement. A parent or relative might even consider making a contribution (as a gift) to their working child’s Roth IRA.
- Build credit responsibly. Before my daughter left for a semester abroad, I co-signed on a credit card with her. She initially said she would only use it in an emergency, but then found it was a convenient way of managing expenses—as long as she tracks it carefully and pays it off every month. Using the credit card also helps build her credit history.
Just like parenting, helping kids become financially secure and responsible adults is life-long. Make the lessons real for them, and don’t be afraid to share stories about things you’ve learned the hard way. Keep in mind, a lot has changed from when we were young. Listen to their experiences so they can benefit from your wisdom.
Here are some ways Arrivity can help the young people in your life:
- Talk to your financial planner about potential options for passing money on to your kids or grandkids.
- Your financial planner can show you the benefits of a 529 educational savings plan. If you already have a 529 set up, find out about new rules that allow more flexibility for using the funds.
- Consider giving your child a financial plan as a wedding gift or when they land their first real job.
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Liz is a Late Boomer in the sandwich generation who started an independent writing and brand consulting practice after years as a senior marketing executive. She lives in Seattle, Washington. Her mother lives nearby and her daughter is a recent college graduate.
The foregoing content reflects the opinions or perspective of Liz Behlke and/or Arrivity financial planners and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful. Arrivity does not give tax or legal advice. Tax and/or legal strategies should be discussed with a professional before implementing.