Entering the Real World: Budgeting Tips for Young Adults
It’s graduation season, and your child (or maybe, your grandchild) has made it. After years of focus and hard work, they’ve achieved their sought-after degree, and it’s time for them to enter the real world. You’re proud of them, and you might also be proud of the help and support you provided along the way.
After you’ve congratulated your child for their accomplishment, it may be a good idea to pass on just a few pieces of wisdom to set them on the right track.
Here are a few ideas to get you started.
Help them focus on saving and paying themselves first.
If your child is just beginning their career after college, it may seem like contributing to savings is difficult—or even impossible. After all, the bulk of their paycheck may already be accounted for by everyday expenses like groceries, rent, and debt (such as student loans).
Help them realize that it’s essential to build the habit of ‘paying themselves first’ – or saving. Even if it’s just a small amount per paycheck, building the habit early will eventually pay off as their career progresses and their salary grows.
Since simply piling up cash in a savings account with no real purpose attached can be underwhelming, consider advising them to work toward concrete goals. For example, building a 6-month emergency fund may be an excellent place to start.
Help them set up financial systems for success.
Once they have begun to build a savings mindset, have them create a financial framework that will lead them in the right direction. Some components of this framework may include the following:
- Automate bills. Paying bills late can result in a poor credit rating, making later financial decisions more complicated than necessary.
- Find the right credit card. Help them select one or two major credit cards with simple, strategic perks (such as miles or cash back) but remember to encourage good credit card behavior by paying off the balance each month.
- Build a budget. Fortunately, this doesn’t have to be complicated. Many easy-to-use budget websites (such as ynab.com, levelmoney.com, and smartypig.com) can make budgeting simple, intuitive, and even fun.
Help them learn the art of conscious spending.
Having disposable income for the first time can be exciting. For the most part, young adults should feel free to spend their money on the things that bring them joy. With a few conscious spending considerations, they can work towards their financial goals and avoid unhelpful spending habits—while still enjoying the benefits of their hard work. Some of the following suggestions may help them to build thoughtful, sustainable, and satisfying financial habits:
- Considering whether a purchase constitutes a ‘want’ or a ‘need’
- Instituting a waiting period before a big purchase
- Looking at a new purchase in the context of an impending credit card bill. Will they be able to pay off their credit card in full this month – or contribute towards their other financial goals?
Help them invest.
Like many young adults, your child might think that their early twenties are too early to start planning for the future—after all, there’s plenty of time still ahead to worry about that! But as you probably know, these early years of their career may be the most fruitful time to invest, as the money invested at this stage has the greatest opportunity for growth. To encourage them to consider the benefits of investing early, you might:
- Explain to them the long-term benefits of compound interest.
- Help them set up and start contributing to employer-provided retirement plans, such as a 401(k)/HSA/FSA. Better yet, encourage them to talk to their benefits coordinator at work to help them through these important steps.
- Help them understand the function and unique benefits of a Roth IRA and have them work towards a goal of funding one, as they’re able to.
Help them protect themselves.
Help your child protect their assets, identity, and reputation with a few proactive planning strategies:
- Help them set up car and health insurance. These can feel like a significant expenditure to a young adult with few health problems, but insurance is vital for financial protection. In the case of car insurance, it’s also a legal requirement.
- Have them set up key estate documents. These documents include a will, a living will, financial power of attorney, and health care power of attorney. If they are a resident of Ohio, they may be able to use these forms to get started.
- Help them understand how to proactively protect their identity. Again, this may not seem like the most prevalent issue for young adults, but, building habits like monitoring statements and keeping confidential information safe can be game-changing in the event of a crisis
Help them stand on their own.
It may seem like a kindness to offer to pay some bills, but that won’t help your child realize the actual cost of living. Instead, help them learn to manage their finances, plan for their future, and protect themselves on their own.
Of course, doing so doesn’t mean that they must accomplish financial wellness alone. If your child needs further help working towards their financial goals, connecting them with an accessible and understanding financial advisor can be one of the best things you do for them and their future.