Talking Money with New Graduates
August 6, 2021 | By Manisha Gupta
By Manisha Gupta, AWM Financial Planning Lead & Candidate for CFP® certification
Summer is an exciting time for freshly minted graduates embarking on their own. Finally, the moment that you have been waiting for is here. Your child is going to be “financially independent”! But are you confident that they are ready for that challenge? Their school prepared them for their career, but did it actually prepare them for handling the money issues? Here are some basic money management tips for the graduates in your life:
Start With the Basics: Cash flow management is the 101 of financial planning and investing. Until you get an “A” on this, you might not do very well in other areas of personal finance:
- Review your pay stub to understand how your total earnings are reduced to net pay after taxes.
- Understand the difference between various types of payment (checks, debit cards, and credit cards), and which one to use, when. If you use a credit card, get in the habit of paying it off every month. Never carry a balance!
- Create a budget to make sure you generate positive cash flow every month. Keep your spending in line with your income. Here are some of our favorite easy-to-use budgeting tools. And a simple spreadsheet budget for a new graduate can look like this one:
And if you have student loans, like in the illustration above, explore your options to keep your payment low enough to ensure positive cash flow.
Keep It Simple: Use this simple three-account approach to manage your day to day cash:
- Open a checking account: This is where your salary comes in and you pay for your monthly expenses.
- Open a “planned” savings account: Use this to save for any major expenses or purchases that you will make in the next 12 – 24 months (e.g, a new car, vacation with friends, and saving for further education.)
- Establish an emergency fund in a high-yield online savings account: The goal of this account is to have enough savings to cover three to six months of living expenses, such as rent, utilities, insurance, student loans, and car payments. This will take a long time to build, so don’t stress yourself out. Start small and keep adding to your emergency fund with automatic monthly contributions until you reach the desired cash level.
- For recommendations on high-yield online savings accounts that are FDIC-insured, check out NerdWallet and BankRate.
Saving for Retirement: This might sound a little absurd at the age of 22 or 23. But remember, small steps in the right direction can result in significant accomplishments in 30 to 40 years, due to the magic of compounding interest and reinvesting dividends. Start by:
- Contributing to your employer’s retirement plan up to the employer match to take advantage of a pre-tax, automatic 100% return on that investment.
- If you are participating on an employer-sponsored high deductible health insurance plan, max out contributions to the HSA account.
- Save in other taxable accounts: This could be done in several ways, such as online high-yield savings accounts, certificates of deposit, investment accounts. The right product will again depend on your needs and goals.
- Finally, build up investments you can access BEFORE retirement. This gives you flexibility to make a career change, move to a different place, start a business, or any other major life change. You can use a basic brokerage account to do this.
All this may sound overwhelming for a 22-year-old who just finished an intense academic experience. But with that journey comes resilience and knowledge. You can reassure these young adults that they have the tools and resources to set themselves up for success. Encourage them to develop the processes, follow them, monitor progress, make adjustments as needed… then REPEAT!
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