5 LESSONS TOWARD FINANCIAL INDEPENDENCE
Young adults who live at home for two years after college graduation can shave as many as five years off their expected retirement age, according to a recent NerdWallet new graduate retirement study. Parents looking forward to finally being empty nesters
Here are five lessons you need to teach your kids before, during and after college to help them launch:
START BY LIMITING STUDENT DEBT
A good rule of thumb: Hold total student loan borrowing to 50% to 100% of your expected first-year salary.
To do that, college students should get a job rather than borrow to cover lifestyle expenses. Exhaust scholarship and grant opportunities before taking out loans.
And the kicker: Be careful with school choice, which has the biggest impact on debt levels.
“Do you want to go to a big school with a great football team and a huge campus, or the state school that offers as good of an education for a third of the cost?” asks Mike Sander, a financial planner in Tarrytown, N.Y. “Our brains are wired to want the nice, shiny, trendy school, but when you start looking at the cost, it often doesn’t make sense.”
And as your children get ready to graduate, make sure they educate themselves on all their student loan repayment options, rather than let the government pick the default plan.
RETIREMENT SAVING REQUIRES A PLAN
Plenty of online tools and advice will walk your kids through figuring out how much to save for retirement. After that, you’re ready to talk savings vehicles. If a 401(k) with matching dollars is an option, this is a short conversation: That match is free money, so the 401(k) should be used first. And payroll deductions for a 401(k) are a hassle-free way to get into the habit of saving.
Otherwise, the best choice is often a Roth IRA. And here’s some good news: A Roth IRA can be opened while in college (or, for the really ambitious, high school) as long as the student is earning income.
YOUR PEAK WAGE GROWTH YEARS ARE COMING RIGHT UP
We often assume that the older we get, the more our salaries will increase. It’s a good excuse to put off saving.
But a recent analysis of Social Security Administration data by the New York Fed found that the bulk of earnings growth happens between ages 25 and 35.
How handy, then, that those early years are also when savers can make the most of compound interest, which has a huge impact on a retirement account balance.
“The earlier you start, the easier it is and the greater the impact of compound growth,” says Andy Tilp, a financial planner in Sherwood, Ore., who also teaches a college course on personal finance.
IF YOU DON’T WANT TO SPEND LESS, YOU HAVE TO EARN MORE
In this “gig” economy, there’s no excuse not to have a side job if full-time work doesn’t pay the bills.
The options are virtually unlimited, but you may need to nudge your grads in the right direction. A few suggestions: Become a rideshare driver. Rent extra space in your apartment on Airbnb. Use Rover or DogVacay to find petsitting clients, or Care.com to find babysitting ones. Rent out your belongings on Zilok, sign up to take on small jobs through TaskRabbit, become a freelance virtual assistant on Upwork, or write or edit content for Scripted.
Offer gentle reminders that this income isn’t to pad an entertainment budget; it’s to fund an IRA.
FINANCIAL BASICS KEEP YOU ON TRACK
Two other things can significantly improve financial security: a budget and an emergency fund. Maintaining the former will make it easier to fund the latter, as well as to save for retirement.
These days, a budget requires little effort, says Stephen Hart, a financial planner in Plano, Texas. “When you have online apps and you can log on to your bank statement at any time, it’s easier than ever to track your spending,” he says. “There’s really no excuse for not doing so.”
“Do you want to go to a big school with a great football team ... or the state school that offers as good of an education for a third of the cost?”
Mike Sander, a financial planner in Tarrytown, N.Y.