Getting an early start to one’s financial life is hard but super important. Nearly everyone I know who describes themselves as “financially successful” got that way by starting early and making a commitment to improving their financial security.
Now that your adult kids have graduated from college and summer is over, it’s time for them to get focused on building a strong financial foundation for their future.
Below are 5 things your adult kids must do to kick-start their financial lives:
Aggressively attack student loan debt. The average college grad leaves school with over $30,000 in student loans. For young doctors and other professionals, student loan debt balances can exceed $200,000.
The amount of interest paid on student loans is just the tip of the iceberg.
For those with the largest debt loads, student loans can be life changing, affecting everything from a young person’s ability to afford their first home to when they get married and how many children they may have – or if they even have children at all.
Take a second job. Delay purchasing a new car. Live at home if you have to. Just do whatever it takes to pay off the loans as soon as possible. Don’t let this hang over your head for the next decade – or longer.
Contribute to a 401k. Even workers with big student loans should contribute at least enough to their 401(k) or workplace retirement plan to take full advantage of any matching contributions.
If your employer matches up to 6% of your salary, contribute at least 6%. It’s the closest thing to free money as it gets.
No match? No problem. 401(k) and similar retirement accounts are still a great way to start a long-term savings program. Contributions are tax deductible and made through easy, automatic payroll deductions.
Once you meet your retirement plan’s match, you can consider other options like Roth IRAs.
Start a Roth IRA. Roth IRAs are funded with after tax dollars and the earnings grow tax-free. Distributions of your original contributions as well as distributions of the earnings are tax-free as well, assuming you meet certain IRS requirements.
To make contributions to a Roth IRA one’s income must fall below certain limits. You can see the limits here.
Depending on their career field and income opportunities, it’s possible that your former student may exceed these limits early in their career. Take advantage of Roth IRAs while you can.
Buy life and disability insurance. Life and disability insurance premiums are cheap when you are young.
The coverage doesn’t have to be much, but a basic disability policy that covers at least half your take home pay, and a 20+ year term life insurance policy with a death benefit of $250,000 or more is a good place to start.
Since life insurance premiums for people in their 20’s are so low, it may make sense to increase the death benefit to $500k+. They might not need that much today, but their financial lives and need for insurance will change in the future. Buying insurance today locks in low premiums and takes advantage of the fact that they are currently insurable. Five or ten years down the road, when they need the insurance the most, that may not be true.
If possible, take advantage of life and disability insurance that can be purchased through work and paid for via payroll deductions. Start here, but consider a personal, private policy as well.
Supplement your existing workplace insurance with private policies that will continue even if you are no longer working at that original employer. For example, if you get sick and leave your job, your workplace your life and disability insurance coverage may end. A personal policy will continue regardless of your employment situation.
Odds are that a young person will not need this insurance. That’s why it’s cheap, but the financial risk to their family (i.e. their parents, spouse and others) is significant. The cost of transferring this risk to an insurance company is not.
Technically, mom and dad aren’t on the hook for their adult kids’ financial needs, but you know that if your kid was sick or disabled you would move financial mountains to help them. A disability policy helps pay their bills if they can’t work. A life insurance policy could reimburse you for expenses and lost income if you need to financially support them in a worst case scenario.
Build a cash reserve. Everyone needs a rainy day fund. How much varies based on a variety of factors. The important thing is to build up a cash reserve now so that when life happens later, you are financially ready for it.
If your current reserve is $0, make it a goal to have $1,000 in a basic savings account at your bank or credit union. Once you hit that milestone you can set your sights higher and consider other options for your money.
Just one more thing. It’s not to soon to talk to an attorney about creating a will and other important legal documents like a healthcare directive and power of attorney. As their parent you might assume that you can act on your adult child’s behalf if they are unable to do so, but this is not always the case.
Even if they create their own documents, having a healthcare directive and at least a limited power of attorney are essential documents that you may need in a time of crisis.
The time to act is now. Summer is over. Your adult kids need to get refocused on their future, start a long-term financial plan, and take responsibility for their financial lives.
They might know this process better as “adulting” and it’s time to get on it.