My daughter just graduated from college. Although she took several economics classes, when it comes to handling her own money, I think she could use a few more lessons. How can I help her become more financially aware and independent?
It's so true that theory is one thing and practical life experience is another. And while I congratulate your daughter on her graduation and applaud her for taking economics classes, managing money as an adult is a whole different type of challenge. Even though more schools are offering personal finance classes, most young people just starting out can certainly use a refresher course.
As parents, we're well aware of the myriad financial responsibilities our kids are going to face—new job, rent, insurance, savings, borrowing—all in an increasingly complex financial world. But in spite of the new challenges today's graduates may face, there are certain universal financial guidelines I believe are important for anyone at any age, and especially for a young person learning to manage their money for the first time.
Here are some practical money management tips to share with your daughter.
- Live within your means—Start by looking at your needs vs. your wants. Use an online budgeting tool to add up essential expenses like rent, transportation, groceries, utilities, student loan payments, car payments, etc. Make saving a certain amount each month one of your essential expenses. Then subtract this total from your take-home pay. Realize that you can't spend more than what's coming in without it leading to trouble. Ultimately this will help you spend mindfully and control your money rather than having it control you.
- Make it automatic—Take advantage of online bill pay and direct deposit. Set up automatic payments for your regular monthly bills—as well as an automatic transfer from checking to savings. Whether it's for an emergency fund, retirement account or a new car, making your savings automatic gives you more time to focus on other things in your life.
- Prepare for the unexpected—Set aside a certain amount each month, no matter how small, for emergencies. Aim for enough to cover three-to-six months of essential expenses in case you're unable to work or you have to cover something like an emergency car repair. Keep this money someplace safe and easily accessible, such as in a savings account.
- Set goals and prioritize—Before you lay out any large sums of money, think through your priorities. What's more important to you: a new car or a vacation? Research prices and save accordingly.
- Plan for retirement—If your employer offers a 401(k), aim for an annual contribution of 10-15 percent of your income between what you contribute and any company match. At the minimum, contribute enough to get the full match. If you don't have a 401(k) or another employer-sponsored plan, open a Traditional or Roth IRA. A Roth can make a lot of sense when you're just starting out.
- Stay on top of student loans—Although most Federal student loan payments are currently paused, once they start again always pay at least the minimum on time each month. Get ahead of the game now by checking out studentaid.gov for information on repayment and possible loan forgiveness options.
- Be smart about credit—Charge only what's absolutely necessary and always pay off your monthly balance in full and on time. To make life easier, limit yourself to a single credit card, at least to start.
- Get insurance—Health insurance is an absolute must, as is car insurance if you own a vehicle. Renters insurance is relatively inexpensive once you have your own apartment. Disability insurance is a smart addition to protect your income.
- Learn to invest—Put your long-term money (for example, your retirement savings) to work by investing. A good first choice is a well-diversified stock mutual fund or exchange traded fund (ETF). Investing in stocks gives you the opportunity for long-term growth, which is valuable at any age, but especially when you're young. You don't need to be an investment expert. Stick with the fundamentals of keeping your costs low, your savings rate high, diversifying broadly, and investing for the long term. And don't be afraid to ask for help from an advisor.
Keep the conversation going
Sharing this information is a good start, but don't stop there. Learning about money management is a process, not a one-time lesson. So continue to talk to your daughter about how to prioritize her finances and the importance of financial responsibility. As she becomes more independent, stay open and involved. Listen to her struggles, be proud of her successes and help her understand that it's up to her to control her money. Let her know, too, that you'll always be there to help her out with advice and support.
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