While my own kids have a while to go until high school graduation, I’ve had conversations with clients about how to set up their young adult kids with strong financial foundations that they can carry with them for years to come. These topics will not only help their young adult children be savvy about their finances – it will help build their confidence to (hopefully) making smart money decisions when the time comes for bigger personal and career goals down the road.
Before they leave the nest, ensure they have these essentials for their (and your) peace of mind.
Smart Spending & Budgeting
Creating a budget is the first step toward financial independence. Track income and expenses, prioritize needs over wants, and use budgeting apps to stay on top of spending. A simple strategy to follow is the 50/30/20 rule—allocate 50% for necessities (i.e. rent, cell phone bill, food, etc.), 30% for discretionary spending or wants, and 20% for savings and investing.
Emergency Preparedness: Will, Health Care Directive & POA
Once your child turns 18 and is a legal adult, you as the parent in many cases cannot make decisions on their behalf in case of an emergency. Give you and your child peace of mind by working with an estate planning attorney to put together a health care directive and power of attorney (POA). These documents are one of the best written advocates in the event that your child becomes incapacitated or passes away.
Investing with Limited Income
Even small amounts can grow significantly over time. As soon as your adult child starts earning income, talk with them about investing a small amount into accounts like a Roth IRA or non-retirement account to start building their wealth. Time is their advantage and investing early on will set the stage for a strong financial future.
Building Credit Responsibly
Building a strong credit early on can open doors to financial opportunities like buying a home or starting a business. Credit card companies, unfortunately, like to prey on young adults – opening a credit card or another line of credit can lead to poor money management habits if there’s no conversation about how to use it responsibly. Start with a secured credit card, pay bills on time and in full each month, and keep credit utilization low. Avoid unnecessary debt and only borrow what can be repaid comfortably.
Saving for Future Goals
Set up an emergency fund with at least three months’ worth of expenses. Consider high-yield savings accounts for better short-term interest growth potential and automate contributions.
While we want to help our kids, don’t forget to set healthy boundaries for your own money.
Education is a core value in my family and culture – my immigrant parents have sacrificed a lot to help my sister and me get through college and establish our own foundations. What I appreciate about my parents is that they ensured that their own financial goals and needs were met while they continued to save and invest for mine and my sister’s future.
As parents, it’s important to set healthy expectations for ourselves on what we can give to our kids financially as well as give them the freedom to learn about how money plays a role in their own lives. It is possible to do both with the right plan and allowing yourself grace to learn along the way with them.
Strong money management is one of the best gifts that we can give our kids to help build a solid financial foundation and set them up for long-term success.
To all the grads and their families – congratulations and we wish you all the best! Let us know how we can continue to support you.