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Anna Cuevas is the National Urban League's new Consumer Advocate, as part of our 2015 Financial Empowerment series. Learn more about Anna here.
Once a student graduates from school, most people believe they should be ready to join the real world and become independent. However, there is one thing most college graduates aren’t taught in school, despite the fact that they are educated and have degrees to show it: money and financial responsibility.
This transition period is a crucial time to talk to your child about budgeting, saving, and credit. For the first time, they are embarking on a full-time career and the pay that goes with it. They are probably receiving offers from credit card companies or are contemplating moving away from home and becoming independent. Now that they’ve graduated, they must start making payments toward their student loans. It can be a time when they create a solid financial foundation, or when they develop poor spending habits that will create a lifetime of struggle.
You’ve provided guidance and life lessons to your child since the day they were born. Now as they embark on adulthood, do them a favor and provide them with the financial guidance that will enhance adult life for years to come.
Talk About Debt
Explain debt to your child and the impact it can have on their ability to pay their bills or purchase a home. While some debt can be good, help them understand that too much debt results in financial struggle, bankruptcy, and poor credit. Show them how to use credit wisely and stress the importance of paying their bills on time and keeping their credit balances low.
Nearly 70 percent of college graduates have education loans and student debt. If your child has student loan debt, now may be time to begin paying for that hard-earned degree. Make sure they understand that student loans are like any other debt—they must be paid on time and they will affect their credit score.
Talk About Saving
While it’s always important to make sure that bills and payments are made, and credit balances are kept as low as possible, stress the importance of saving at a young age. A savings account is necessary for emergencies, potential jobless periods, and for big purchases, such as the down payment for a house. Let’s not forget that it’s never too early to save for retirement. Putting some money aside into a savings plan, even now at a young age, is a wise investment that will reap rewards for years to come. So, while they are paying toward their student loans for their past education, encourage them to put a little aside for their future financial security.
Talk About Credit
To young adults, credit seems like a gift—a plastic card that keeps on giving. However, credit comes with a cost, called interest, as well as fees and penalties for late payments. Explain how credit works and how their credit report can be used by potential employers, landlords, insurance companies, banks, and other lenders, etc.
It is important to have a credit history. If your son or daughter does not have one, help them apply for a secured credit card. With a secured credit card, an amount equal to the credit limit is deposited. The good thing about secured credit cards is that you cannot spend more than your deposit; therefore, your child won’t find him or herself drowning in credit card debt and overspending with money they don’t have. Once your child develops a positive history of making payments on time, he or she can apply for a major credit card with lower interest rates and favorable terms.
Show your child how to order their free annual credit report and how to read it. Get your copy from all three credit bureaus at www.freecreditreport.com. Teach them at a young age how to look for inaccuracies and signs of identity theft.
Today’s college graduates are technologically savvy. Through their phones, iPads, and other devices, they buy online and bank online. These are great conveniences and time savers, but make sure your child is cognizant of scams, like phishing, spyware, and unsecure sites that could compromise their identity and personal information.
Talk About Retirement
Retirement is part of savings, but once your son or daughter goes from being a full-time student to being a full-time employee, they’ll have to make choices. Social Security won’t be sufficient support in their senior years, so they’ll need to create a nest egg. Make sure they know the benefits of a 401k savings plan and employer-matched contributions. Look into retirement plan options, and if their employer does not offer any, discuss the benefits of putting a percentage of their income aside into a Roth or traditional IRA that will also earn interest.
Talk About Insurance
Young adults rarely worry about health issues, so insurance isn’t often high on their list of priorities. If their employer does not offer or provide insurance that meets the minimum standards, have them meet with an insurance agent or a representative from your state’s government health exchange to find a health insurance plan. Don’t forget the importance of dental insurance and life insurance. Purchasing life insurance at a young age results in lower premiums, and some plans allow the insured to borrow against their policy over time.
Talk About Spending
Last, but not least, talk to your child about spending wisely. Money doesn’t have to burn a hole in their pocket, and a “you can’t take it with you” attitude is likely to backfire. Teach your graduate the importance of spending wisely, whether that means paying cash for an older used car versus going into debt for a new car, or brown bagging it instead of eating lunch at a restaurant every day. That doesn’t mean they cannot enjoy the money they earn; it just means that they know how to budget their money so they have enough for emergencies and the important things in life. Concerts, ball games, and other activities are fun, but in moderation. Living from payday to payday isn’t fun at all. Help your child create a realistic budget that fits their needs.
While these are broad categories, they will enable you to help your graduate start their new adult life on solid financial footing. It may not be a talk they want to have, but it’s one they need to hear. Let it come from you—someday, they will thank you.
