If you have children in their late teens or 20s, they may be able to vote, buy a drink and — if they’re lucky — get a job. But what they don’t know about managing their money probably scares the heck out of you.
Don’t worry, you’re not alone.
So many parents are concerned about their adult children’s puny knowledge of personal finance that there’s a cottage industry, known in wealth management circles as “NextGeneration” programs, built around teaching Money 101 to kids 18 and older.
Still, it's up to you to offer the introductory lecture.
When your kids were little, you probably talked with them in the abstract about the importance of saving, earning money and giving to charity. Now it’s time to move on to real-world matters, like budgeting, saving the money they earn from employment, managing debt and health insurance. (Next Avenue has another article on how to help your adult kids land a job.)
Here's how to proceed:
Setting Up a Budget
As soon as your kids have money coming in — whether it's a salary or cash you’re providing until they can support themselves — they should learn how to budget.
“College can feel like a paradise of $2 pints and seemingly free cafeteria meals, so a lot of otherwise smart young people graduate without a clue when it comes to budgets,” says Beth Kobliner
, author of Get a Financial Life: Personal Finance in Your 20s and 30s
and a member of the President’s Advisory Council on Financial Capability.
Kobliner suggests telling your son or daughter to use a free budgeting website, like Mint.com
, which relies heavily on graphics. “When you’re looking at a pie chart detailing every dollar you’ve spent in the last few months, it’s easier to figure out where you’re wasting money,” she says.
Sharon Lechter, founder of Pay Your Family First
, a financial literacy organization, recommends the budgeting advice and tools at a site run by the American Institute of Certified Public Accountants: 360financialliteracy.org.
Managing Debt and Credit Cards
When the lecture turns to debt, the most important thing you can teach your kids is the difference between good debt and bad debt.
Taking on debt that will help your child earn a living in the future, like student loans, is an example of good debt — as long as the borrowed amount isn’t excessive. The Income-Based Repayment
(IBR) program for federal student loans, which caps monthly payments based on a borrower’s income and family size, is a smart way to handle these loans. The program, which your son or daughter would need to apply and qualify for, generally limits loan payments to a maximum of 10 percent of annual income, over a 10-year period, and even less for borrowers with low earnings.
Then there’s bad debt. This is money your kids owe on stuff they shouldn’t have purchased in the first place, or unnecessary interest they incurred when they could have paid in cash.
When it comes to screwing up young adults' financial lives, credit cards are Public Enemy No. 1. As Kobliner says, credit card debt is “a fast way to sink your financial life before it even gets started.”
And it's pretty easy for kids in college to get the cards, since they're frequently pitched them (though not as much as before the 2009 Credit Card Act passed). They may be told by card marketers that they should sign up for the plastic to start building their credit history. That's generally not wise. A better idea: have your child become an "authorized user" on your credit card. That way, you can keep an eye on his credit-card use and his credit will get a boost by your good debt habits.
Explain to your kids that paying credit-card bills late — or any bills, for that matter — and missing payments can ruin their credit history. In the future, this could either jack up the interest rates they’re charged on car loans and mortgages or disqualify them altogether.
And well-meaning parents, beware: If you’re a co-signer on your child’s credit card, and he or she pays late or not at all, your credit history will take a hit.
Give your kids these suggestions about managing debt:
Use a prepaid debit card instead of a credit card, so there’s a dollar limit on purchases on the card and no interest charge.
Check sites like mint.com and bankrate.com to find the lowest interest rates on credit cards.
Use an online debt calculator to learn how long it will take to pay off your balance. (Next Avenue offers a helpful debt calculator that's easy to use.)
Order a free credit report annually from annualcreditreport.com to review your credit history and clear up any mistakes on credit bureau reports.
And if your kid has already dug himself into a deep debt hole?
Don’t pay it off for him, Lechter says.
Instead, work together to help him set up a debt-repayment plan. “Bring in a debt counselor,” Lechter says. You can find a free or low-cost counselor through the National Foundation for Credit Counseling.
Saving for Emergencies and Retirement
Be sure to talk with your adult child about the importance of setting up an emergency savings fund.
Janet Al-Saad, managing editor at Mint.com, recommends estimating essential living expenses for six months and using that figure as the amount to put into the emergency fund at a bank or in a money-market mutual fund. Al-Saad says you should tell your son or daughter: “Just keep saving until you get there. If you lose your job or get robbed, you’ll have something to fall back on and you won’t feel panicked.”
Once your kid is checked off on an emergency savings fund, get him or her to start putting money away for retirement through a 401(k) plan from work or an IRA.
“The biggest problem I see when it comes to young adults and money is that they don’t understand that they need to make room in their budget for their own savings,” says Bob DiQuollo, a financial adviser for Brinton Eaton in Madison, N.J. “If their company has a 401(k) plan with a match program, you need to show your kids that if they put one dollar in and the company matches, it’s like getting free money and it really adds up.”
For people in their 20s, health insurance is easy to overlook. “Young people think they’re invincible," Kobliner says. "But without insurance, a sudden accident or illness can cost hundreds of thousands of dollars and destroy a financial life as it’s just beginning.”
Under the current health reform law
, health insurance plans that offer dependent coverage must let young adults stay on their parents’ health plans until they turn 26. They can even stay on your plan if they’re eligible to enroll in their own employer’s plan. You might want to keep them on it if your health plan is better than the one offered by your child's employer. If so, tell your child to pay you for the cost of his coverage.
If you don’t have a health insurance plan that covers children, Kobliner says, tell your adult child to find a low-premium, high-deductible policy that at least covers catastrophic medical costs. The website ehealthinsurance.com
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