Money 101 for (Imperfect) Parents and Grown-Up Kids

Parental guidance about money matters can be worth its weight in gold to help grown-up kids reach financial autonomy. Before launching young people into the world of earning and spending, it’s wise for parents to share their financial know-how: smart budgeting and financial planning; establishing credit and using it wisely; handling student loans; getting the necessary health insurance and savvy saving.

Of course, many parents have hardly led exemplary financial lives themselves, and many were wounded deeply by the financial doldrums of the past decade-plus. But even here your advice and experience can be valuable. If you’ve suffered financial reversals in the course of your adult life—and who among us has not?—you can provide the benefit of your hard-won experience so your children will not repeat those mistakes.

As Emotional Currency author Kate Levinson puts it simply: “Being clueless about money is no longer affordable.” Here are our guidelines for turning money taboos into talking points:

Bringing up the B-word may make young eyes glaze, but before children leave home, parents will do well to introduce some budgeting basics, particularly the most basic rule of all: Spend only what you can afford. Suggest a trial-run of tracking expenses for a month or so to compare income and outflow and see which costs fall into which categories: steady costs like rent, utilities, insurance, food, clothes and entertainment, and big-ticket items like tuition, a car, furniture, travel and so on. Online banking sites provide an accessible way to make a habit of tracking expenses as do websites (and apps) like Mint.com and Learnvest.com.

Setting spending priorities is a crucial building block for future financial planning, and in the best case scenario wise budgeting will lead in that direction. Tracking expenses will suddenly make trade-offs become clear: Spend $150 on dining out each month, or eat at home more often and sock away that money toward student loans (or a big splurge trip to Cancun)? For a young person who doesn’t yet know about deferred gratification, this could be the time to introduce it.

While most twentysomethings do their banking and bill-paying online, it’s still not a bad idea to teach the ancient arts of check-writing and checkbook-balancing before they set off on their own. Also advise young people to shop around before selecting a bank and setting up a first bank account. Compare monthly checking and ATM fees along with overdraft or bounced-check charges and make sure that comeons to get new student accounts are actually beneficial.

As Carmen Wong Ulrich reports in Generation Debt, Millennials are the most debt-burdened generation in history: In 1970, the average credit card holder owed $158; today that number has ballooned to $7,500, and younger folks owe a large chunk of this debt. Particularly if their credit card debt is added to their student loan debt, by their twenties, young people may be drowning in it.

There’s no better way to teach young people to spend within their means and stay away from credit card disasters than to advise paying in cash as they go. If used wisely, a credit card can be a convenience; if misused, it can turn into a sinkhole. Since the 2009 Credit Card Act, credit cards are issued only to those over 21. For parents who want to help teach responsible credit card use, some financial experts suggest opening a joint, low-limit credit card with their 18- to 21-year-olds to educate them to pay bills on time and help them build a good credit score. That way, when they turn 21, they’ll be better able to get a credit card and rely on their credit score as they apply for loans.

In any case, make sure that young people comparison shop for the best credit card deal (ideally no or low annual fee and the lowest interest rate and late fees available). With today’s credit card interest rates at a staggering 18 percent (and punitive rates spiking to 25-30 percent for missed payments or charging beyond a credit limit), the smart path to solvency—and to safeguard that important credit score—is to pay each bill in full by the due date. Any missed payment can harm a credit history and make it harder, if not impossible, to get a loan later on. Simply paying the minimum required each month can turn out to be very costly over the long haul.

Especially during their early twenties, when some emerging adults may not be at their most responsible, a debit card may be a smarter choice than a credit card. With a debit card, the funds are transferred immediately from a user’s bank account, not deferred to be paid later on. And if a user tries to make a purchase on a debit card without enough money to cover it, the transaction will be declined—another stop sign to spending what isn’t there.

Some 70 percent of college students currently graduate with debt, and the class of 2015 has the dubious distinction of carrying more student debt than any graduates in history: $35,000, according to an analysis of government data by Mark Kantrowitz of Edvisors.

While all student loans need to be paid back starting after graduation, government-backed loans (also known as federal education loan programs) have some distinct advantages over private loans. Government-backed loans (serviced by companies such as Navient Corporation) don’t need to be co-signed by a parent, and they offer a short, post-graduation grace period before interest payments start. After four years of perfect repayment, the government will shave up to 1 percent off the interest rate (a good savings on a 6 or 8 percent rate). Private loans do need a co-signer and interest charges kick in as soon as a student graduates.

Public Service Loan Forgiveness (PSLF) is a federal program, established in 2007, to encourage young people to go into public service. For people in government, nonprofit, and other public service jobs, this program cancels any student debt that started in 2007 or after and still remains after ten years of making qualifying payments. There are also federal loan forgiveness options available for teachers in inner-city schools, nurses, and AmeriCorps and PeaceCorps volunteers.

With unemployment twice as high for emerging adults as for older workers, another important federal program to know about is the Income-Based Repayment program, available to student borrowers but not their parents. Updated by President Obama in 2011 as “Pay as You Earn,” it caps monthly loan payments at 10 percent of income each year (even lower for borrowers with low earnings), and forgives any debt remaining after 20 years. This is a big deal for grown kids and their parents who may have feared that a big load of student debt would gobble up half the kids’ income for years.

In 2010 about 30 percent of Americans between the ages of 19 and 29 had no health insurance and were one broken ankle away from a financial meltdown. But today, thanks to the Affordable Care Act, young people can stay on their parents’ health plans until they turn 26, and 3 million of them have done so.  After 26, if they’re not covered by their employers, they can get reasonable coverage through state health insurance marketplaces: 6 in 10 young adults will qualify for coverage that costs $100 or less a month after subsidies.

If you can afford to help your 20-somethings cover this policy until (you hope) they find a job that offers health insurance, this is money well spent. If you can’t afford to contribute, make it clear that having health insurance is a top priority—and required by law—even if your grown-up kid feels healthy as a horse right now.

Even high-schoolers can learn to start saving, and the good news from the College Savings Foundation is that more of them are putting away earnings for college than ever before, according to their sixth annual survey of sophomores, juniors and seniors: 51 percent versus 44 percent last year and in greater amounts than ever before; 83 percent have already put aside at least $1,000 this year, compared to 67 percent last year. That may be just a drop in the tuition bucket, but it can also be the start of a valuable lifetime habit.

When young people start making a steady income and are able to cover their own living expenses, they need to do several important things at once—pay off high-interest debt, build a rainy day fund and save for retirement.

The top priority, all financial experts agree, is getting rid of any high-interest-rate debt they’ve built up, especially from credit cards. They need to put aside a certain amount of money each month to attack that debt and stay at it until it’s paid in full. And if it’s been a deep hole, cutting up the credit cards and paying for things through debit cards or cash only may be the best long-term solution.

Although putting hard-earned money into savings may be a low priority for young people in their twenties, financial experts recommend they set aside at least 10 percent of income to build a three- to six-month emergency fund. Retirement may feel as distant as the moon in the twenties, but do give newly employed children the “compound interest talk,” and encourage them to start saving for their later years now. If they have a job with a company 401K plan, urge them to take advantage of it, especially if the company matches their contributions (usually half of every dollar they put in, up to a certain dollar amount). Although that money is not accessible without a 10 per cent penalty until they’re 59 1/2, it will grow tax-free over the years—and be taxed only on withdrawal.

For those young people who can’t access a retirement plan through work, it’s still smart to establish an IRA (Individual Retirement Account) and make annual contributions to it—up to $2,000 per year. Even a smaller amount will accrue nicely over the decades, and it’s also tax-deductible right now. It helps to set up an automatic monthly deduction. Making these IRA contributions will build the savings habit in young people and slowly start cushioning their old age. For parents who probably won’t live to see their children’s retirement, it’s reassuring to know they’ll have a good nest egg when their time comes.

If you find yourself grumbling about how the financial drain of parenting is lasting much longer than you expected, take heart. Most emerging adults are striving steadily to reach financial independence, and by age 30, most have at last emerged into stable employment with a higher income (often combined by then with a spouse’s or partner’s earnings). Like you, they look forward to the day when the Bank of Mom and Dad can close its doors for good.

Until then, during these financially uncertain years, any judicious help that you’re able to provide will enhance the likelihood that your emerging adults will flourish in their twenties and beyond. As young people become adults it’s also good to be reminded of the interdependence of all stages of life. Right now, you may be stretching your resources both to assist your grown kids and to help out your elderly parents with medical expenses, housing, or more. But one day you’ll be the elderly generation, and your children will have learned from you how to give a helping hand.