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    Welcome to the Real World: Financial Advice for New Grads

    June 16, 2010

    Dear Carrie,

    My daughter has (at last!) graduated from college. Although she took several economics classes, she really doesn't have a clue about handling her own money. How can I help her get started on the right foot?

    A reader

    Dear Reader,

    Congratulations! Your daughter's college graduation is quite a milestone, and I'm sure you're very proud of her. But I am particularly delighted that you recognize her education is still incomplete. Most young adults have received no instruction about personal finance at the moment they need it most: when entering the workforce and starting "real life." With your daughter, I'd start with a few basics, both "big picture" ideas and some very practical ones.

    Live within your means. This is a big one, and everyone should follow it. Your daughter should budget her money (including some for savings, which I'll mention below), and pursue a lifestyle she can afford. This will keep her out of debt, help her build wealth for the future, and—just as important—reduce her anxieties about money.

    Plan for retirement. This may seem ludicrous to someone in her early 20s, but if possible, now is the ideal time for your daughter to start building wealth for retirement. If she can start putting away 10 percent of her income for this big goal now, she'll probably never have to increase that percentage. If she's at a job with a 401(k) and a company match, at the very least she should take full advantage of the match. Otherwise, a Roth IRA is a smart move.

    Plan for the unexpected. Urge your daughter to start creating an emergency fund that would cover her basic living expenses for three to six months in case she enters a prolonged period of unemployment. Even if she knows that you can be a safety net, she'll relish the sense of independence a nest egg can offer.

    Have health insurance! Mandatory, even for the healthiest 20 something. A bad accident or an unforeseen illness can be ruinously expensive. If your daughter can get health insurance through work, perfect. If not, she should be able to stay on your policy as a dependent (provided she's single and under 26), thanks to the healthcare bill signed into law in March. Check with your insurance company or human resources department for details (the bill takes effect on September 23, 2010). If she can't be covered under your policy and she doesn't have a job that offers healthcare benefits, shop around and find a policy. If she's healthy, a high deductible policy should be inexpensive.

    Start a banking relationship. Most college kids today have checking accounts with ATM/debit cards attached, so they are familiar with how these work. If your daughter needs a new account, look for a no-fee or very low-fee account (some of the online banks offer debit/ATM cards and charge no fees). And understand the rules about overdrafts, particularly the fees associated with them. She should also get a credit card and begin building her credit history. Again, a no-fee, low-interest card is best—but urge her not to carry a balance unless absolutely necessary (explain the dangers of compound interest; make sure she reads the fine print to understand interest rates and penalties for late or missed payments). There are new rules about credit card disclosures designed to inform and protect consumers—and you (and she) can read about them at the Federal Reserve's website.

    Start repaying student loans. If your daughter took out student loans, help her find out the mechanism for repayment and when repayment should begin. Like credit card debt, she won't want to become delinquent on a payment. By the way, if she's going into a very low-paying field, she might be eligible for a new program that lowers her monthly payments. (Check out

    Help her learn about the financial markets. If your daughter is starting to save part of her paycheck, she should also become acquainted with the basics of investing; for example, the instruments (stocks, bonds, mutual funds, and exchange-traded funds), the concept of risk v. reward, and the importance of diversification and asset allocation. Don't expect her to become an overnight expert; you're really just sowing the seeds for further learning.

    Remind her that she's in control of her financial destiny. Finally, explain to your daughter that part of being a grown-up is being financially responsible—and that once she's gainfully employed, she's in control. She can choose to live within her means (or not); to save for her retirement (or not)—but she will have to live with the consequences.

    I think most college grads (and even younger kids) are interested in personal finance—knowing about money and how to use it is part of being an adult, and they're eager to be independent. Get your daughter started on these necessities and help her understand the importance of financial responsibility. Being irresponsible can have seriously negative consequences; just as important, knowing how to handle money can really boost her confidence and help her achieve her life goals. And let her know, too, that you'll always be there to help her out with advice and know-how. Good luck!

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