With back-to-school right around the corner, we wanted to use this blog to address preparing young adults for their financial future. particularly those between the ages of 15-24. While some of these topics are especially important for young people, many are relevant for all ages.
There is a common misconception that “budgeting” is restrictive – that one must eliminate life’s pleasures – trading a night out with friends for a single serving of Cup Noodles ramen at home. Not so.
Rather, having a budget simply means that you’re thinking about money decisions before making them. The idea is to become more intentional with your spending so that you’re not forced to stay home, alone, eating Cup Noodles simply due to short-sighted planning.
So, in the same way that a recent college entrant has to learn about balancing their classes, homework, study hours, extracurriculars, and social life, they also need to learn how to prioritize their financial wants vs. needs.
Not having experience managing month-to-month living expenses is no excuse for unconsciously blowing through funds – whether their own funds, loaned funds, or the supplemental money provided by the bank of mom & dad.
Budget Practice for Young People
One way for our children to manage their wants vs. needs as it relates to finances is to give them a sense of agency and personal responsibility in how funds are spent.
When it comes to back-to-school shopping, consider giving your high schooler a budget to spend on new clothes, shoes, backpacks, and other discretionary items they may need. If you’re feeling generous you can even let them know that whatever they don’t spend, they can keep.
“Want those new Jordan’s? Have at it! But don’t complain when you’re remaining funds only afford you a pair of shorts and a t-shirt!”
Those $60 Vans almost immediately begin looking more appealing.
For parents providing their college-aged kids with supplemental funds, consider setting parameters around monthly living expenses.
Always re-funding their checking account and/or paying off the credit card bill in full each month is unlikely to instill personal responsibility as it relates to finances.
Instead, consider setting a monthly amount that you’ll contribute to their debit account. If you’re child exceeds that and there’s still five days left in the month they’ll either learn to love those Cup Noodles or they’ll adapt… or they’ll get frustrated and tell you you’re a bad parent.
In any case – they’re learning through living.
Big Ticket Expenses
Inevitably, there will be cases when your child asks for your support for bigger ticket expenses.
Examples: a spring break trip, studying abroad, or purchasing a car.
Does your child need to fund any one of these fully through their summer job, work-study, or internship? As parents, that’s your call. It’s likely that many parents reading this either self-funded these things or skipped out on them because both parental support and personal funds were lacking.
However, for parents that are lending financial support to children, getting your child to contribute towards the larger goal – perhaps a defined percentage or an agreed upon amount – is a great way for them to have skin in the game.
Developing a Good Credit History
Building good credit history is an important task. In an increasingly cashless society, creating a track record that shows you are a reliable borrower is a major step in the right direction towards financial independence. The sooner one begins, the better.
Secured Credit Cards
Getting a credit card can be a challenge for those without a credit history. This is where secured credit cards come in. Children over the age of 18 can qualify, regardless of income.
REASON: A secured credit card requires putting down a security deposit (think: collateral) that acts as the card’s credit limit. It’s kind of like your little one riding with training wheels again… but it builds their credit history.
We found Bankrate’s list of secured credit cards helpful to sort through the variety of options.
Do note that secured credit cards are not the only way for a young person to get access to a card that builds their credit history – they can also be added as an authorized user on a family member’s credit card.
Establishing good credit at a young age can open up opportunities down the road and credit scores can impact all of the following:
- Leasing an apartment
- Setting up utilities
- Applying for a job
- Buying or leasing a car
- Purchasing a cell phone plan
- Interest rates for credit cards and various loans
Additionally – there are some basic rules of thumb to ensure that credit is being used appropriately and improving a new borrower’s credit score:
- Set up automatic payments (to ensure no missed payments)
- Keep credit utilization below 30% credit utilization (i.e. staying below 30% of total credit limit)
- Pay off your balances in full when due (i.e. not paying off immediately after each transaction)
- Make student loan payments on time
DID YOU KNOW: Your three free credit reports can be accessed directly from annualcreditreport.com – the only source for free credit reports as authorized by Federal law.
Other important financial know-hows for young adults:
Knowing How a Bank Account Works
Do they understand:
- minimum balance requirements?
- overdraft and service fees and how to avoid them?
- how long it can take to transfer funds between different accounts and institutions?
Being Smart About Cybersecurity
Many students use shared Wi-Fi networks that are not secure – are they aware of this?
Consider investing in a Virtual Private Network (VPN) to establish a secure, encrypted connection between your child’s computer and the internet.
No need to buy new if you can rent or buy used.
Student Loans & Delayed Gratification
For those that take out student loans, it’s not uncommon to have some extra funds available after tuition/room/board fees are paid.
No – these funds are not fun money. Student loan borrowers should be reminded that the longer these surplus loan funds can be stretched, the less they’ll need to fork over for monthly repayment when they begin working.
Children with on-the-books earned income are also likely to be in a low (or zero %) tax bracket. This presents a great opportunity to open and fund the golden egg of their future financial plan: a Roth IRA.
Discussing household finances is, unfortunately, a taboo subject in many families. However, the more proactive we can be in preparing young adults for their financial future the better we can equip them with information to help them avoid common pitfalls and succeed.
So – please – think about those young adults (or soon-to-be young adults) in your life and share what you can. Each of us stands on the shoulders of those before us. Even if you don’t feel that your lived experience is worth sharing, it’s highly likely that a young person could glean gems of wisdom from both your financial successes and your defeats.
Parents: Also be aware of recent FAFSA updates and the pros and cons of cosigning a student loan.
CLIENTS: We are offering an on-demand financial literacy course that your children have access to for FREE. This is not only a great educational opportunity for them, but also something they can leverage on their resume or school application.
Please be in touch if this might be of interest.