5 Things to Tell Your Graduating Senior About Money

photo-1428604467652-115d9d71a7f1The National Association of Colleges and Employers recently published their Class of 2014 First-Destination Survey which found that the average starting salary of college grads in 2014 was $48,127 with engineering majors topping the list. If they make good financial choices now, your kids and grandkids can build a financially secure future.

Below are 5 things to tell your graduating senior about money.

Commit to life long (financial) learning. There has never been more information available nor has information ever been more accessible than it is today. Download a book (The Millionaire Next Door). Listen to a podcast. Subscribe to a blog or a financial publication.

In addition to my own, I like Sophia Bera’s blog at GenYplanning.com and both the online and print versions of Bottom Line Personal. Sophia provides practical advice for people in their 20’s and 30’s. Bottom Line provides “inside information from the world’s best experts”. They write short pieces about a variety of topics, personal finance being one of their favorites.

Personal finance isn’t always everyone’s favorite topic. In fact, many people avoid it as much as possible. But like it or not, money is going to be a part of your life, for the rest of your life. You might as well be smart about it.

Start saving now. The sooner you start saving, the better. Even if you have student loans or other debt, get into the habit of paying yourself first and saving on a regular basis. Recently I met with a client who is one of the rare few with over $1 million in his retirement plan. This client has a job that has never paid a bonus, never offered stock options, and never paid out a lump sum cash benefit. When asked how he was able to accumulate so much money the 53 year old said “When I started my first job, I made the maximum contribution to the 401(k) and I have just always done that.”

Even small amounts add up over time. Thirty years ago my grandmother told me to start saving $25 a month. $25 a month wasn’t much. What difference could it possibly make? Well, if I had saved an extra $25 a month for the past 30 years, the difference would be enough to pay off your student loans – and then some. (The average MN student graduates with over $30,000 in student loan debt).

Max out the match. If your employer offers to match your contribution to their employer-sponsored retirement plan, take it. It’s “free money”, as they say. According to research done by the Plan Sponsor Council of America about 83% of companies surveyed offered a 401(k) plan, with an average employer contribution of 2.7% of your salary. Most companies that offer a match will match 50% or more of what you put in, up to certain limits. Many companies will even match your contribution dollar for dollar.

Depending on how much you contribute, half or more of your 401(k) balance could be attributable to the company match. Sadly, up to 37% of 401(k) plan participants don’t contribute enough to their retirement plan to get the full company match.

Start a Roth IRA. After you have funded your 401(k) up to the match, switch over to a Roth IRA. Unlike the 401(k), you won’t get a tax deduction on your contribution, but all earnings grow tax-free. Plus, you can access your principal without tax or penalty if you need it. Over the course of your financial lifetime, taxes will prove to be one of the biggest drags on the total return of your investment. If you can avoid taxes by investing in tax-free vehicles like a Roth IRA, you will accumulate more money and have more available to you in the future.

Buy some insurance. Few people argue the need for health insurance. You might be able to continue on your parents plan until you are age 26. In some cases it might pay to have your own policy. Regardless of what you do, make sure you have at least a major medical policy that will cover you for the big stuff.

When it comes to life insurance, young people often feel they don’t need it. First of all, you are young and invincible. What could possibly go wrong? Second, you probably have no kids, no mortgage, none of financial obligations that typically come with adult life.

So why life insurance? Here’s why: to help reimburse your parents after they spend their life savings paying for your care when something happens to you. I know the odds are slim that this would happen, but when something does happen it’s not unusual that medical expenses exceed your insurance coverage or are not covered by insurance at all. It’s also possible that you may require a long period of 24/7 care because of an illness or injury that eventually leads to your death. I know this isn’t a pleasant topic, but financial planning isn’t always about how to spend your millions. The next time you see a flier for a pancake breakfast for a sick neighbor or friend, you will know what I mean.

Term insurance is cheap, probably less than $15 a month. And for a young, healthy person it’s easy to get. You probably won’t need it. Buy it anyway.

Young people today have a bright future. Although the challenges they will face are great, our kids have more going for them than any generation in history. By educating themselves on the basics of personal finance, saving early (and often), and getting some insurance for the big things that can go wrong they will go a long way towards building a future that is financially secure for them and their families.