Few things prepare young adults for the financial realities of being independent, but that does not mean that you can’t sit down with them and go over a few pointers to help them start on the right foot!
Most adults can look back on their late teen and early twenties years and remember feeling invincible, but really having no clue how to manage the responsibilities of living alone. Chances are, they will be reluctant to eagerly accept your advice, but planting a seed is the first step to growing a flourishing plant.
Here are 7 discussion starters you can use with teens
Help them understand the purpose and general structure of a budget. Show them a month of your own expenses if that helps. There are plenty of helpful templates online that offer user-friendly customization so your new grad can visually see the various financial responsibilities that will be awaiting them: Housing and utilities, vehicle/transportation, food, health insurance, education expenses, clothing, and miscellaneous are all great starting points, depending on your teen’s lifestyle and needs.
Talk about the importance of regular saving, before things like marriage and family become top priorities. Most financial experts recommend having an emergency savings fund with at least 6 months of all expenses in the event of a sudden job loss or unexpected emergency. Looking back on my own personal youth, I can recall a plethora of times that I spent a lot of money on silly, frivolous things. Hindsight is 20/20, but encourage your budding independent adult to truly think about the practicality of purchases and to avoid spending unless it is necessary.
Discuss the compounding impacts of large purchases. A newer, more expensive car is much more than just a slightly higher monthly payment. Insurance costs typically increase when the value of the vehicle does. Annual taxes are also much higher on a more expensive vehicle. Additionally, maintenance and fuel costs are important to consider before diving into a large purchase, just because you can.
Encourage your teen to explore various options for investing. Certain IRA accounts allow for taxes to be paid now, rather than later, which can potentially save a tremendous amount of money. Other growth allocated platforms can quickly generate more value through higher interest rates. Clark Howard wrote a great article about how a ’15-year-old teenager can save just $2,000 a year for 7 years. Then, never saving another penny again, the money can grow to be $1,000,000 at 65.’ Although his prediction is dependent on economic activity, the premise holds a lot of possibility.
Talk about the dangers of ruining your credit and how long it takes to rebuild your reputation in the financial community. Not only can credit troubles prevent you from making larger purchases if and when you do need them, but it can also impact your ability to qualify for housing or even certain jobs. Urge them to protect their fragile credit by paying bills on time.
Discuss what it means to live frugally and ways that your teen can make realistic and practical decisions when it comes to their money. Shop around for the best prices. Meal plan. Clip and use coupons. Do not hesitate to ask for a student discount. Being on a tight budget leaves little room for spontaneous or unplanned spending.
Don’t be afraid to disclose your own personal failures when it comes to finances. For most people, they will not understand the impact of independence until they are walking and living it, and that includes learning from your mistakes.
Graduating and moving on to the next chapter of your life is an exciting and overwhelming time, but it can also be the perfect time to establish healthy views and practices when it comes to personal finance.