Money Management 101: Financial Tips for Your Kids Entering the Workforce
When we’re young, we have so many lessons to learn—one of the most important being how to manage our money. If your kids are starting to enter the workforce, whether it’s a part-time job just for the summer or a full-time job after graduation, it’s essential they know how to practice healthy financial habits.
Here are the five most important things to teach your children about money management when they start working.
1. Be Realistic About Budgeting
When teaching your kids entering the workforce about money management, you should first focus on budgeting. Many of us learn the value of keeping a budget from a young age, but you never know exactly how difficult it can be to stick to one until you’re living on your own with bills, expenses and other incidentals to pay. That’s why it can be integral to your child’s financial literacy to teach them how to be realistic about their personal budget.
To set a realistic budget, your kids should consider the following:
- What expenses are consistent every month (e.g., rent, student loan payment, car insurance)?
- What expenses vary every month (e.g., utilities, groceries, medical bills)?
- For the expenses that vary, what is the most they anticipate paying in a given month?
- How much would they like to spend on entertainment and other luxury expenses? How does this compare to what’s left over after necessary expenses?
- What are their savings goals and how much can they commit to putting aside to work towards those goals every month?
Remember: It’s always better to stay under budget and have funds left over at the end of the month rather than end in a deficit. So being honest about how much they might spend on things like dining out or buying concert tickets is key to sticking to a realistic and reasonable budget.
2. Pay Down High-Interest Debt First
It’s likely that your children will be entering the workforce with student loans to pay off. Before tackling any ambitious investing or savings goals, they should realize the value of paying off high-interest debt first. This means, especially with private loans—which are more likely to have high interest rates—they should focus on paying off the most they can afford every month.
3. Take Advantage of Employer-Sponsored Benefits - But Consider Future Tax Implications
Especially if your children are starting in the workforce with a full-time job, they may have benefits offered to them by their employer. It’s essential to teach them how to make the most of their employer-sponsored benefits, including 401(k) plans and healthcare plans.
While your children may not see the benefit of saving for retirement in their late teens or early twenties, getting started early can make a world of difference, especially when it comes to employer contributions. You can explain the benefit of participating in a 401(k) plan by making it clear that employer contributions essentially represent free money for the purpose of saving for retirement. If your child receives a match in his or her 401k plan, this is a great way to start building up retirement assets early on. And those funds will compound over the course of their lifetime, setting them up for success in planning their ideal retirement when the time comes.
However, odds are good that taxes may be a lot higher in the future when your child retires, so it is also important to consider tax-advantaged savings plans such as Roth IRAs or Roth 401k plans. If your child has the opportunity to contribute to these plans early on in their career, when they can still qualify under the income limits, this is a great way to make sure they have a tax-diversified portfolio.
4. Set Short- and Long-Term Savings Goals
Another lesson to teach your kids entering the workforce is how to set both short- and long-term savings goals. Putting money aside in a savings account is a good starting point, but setting clear and measurable financial goals can make a big difference in your children’s money management skills.
Start off by having them set a goal for a year from now. Is there a specific trip they want to take? Or an item they’d like to buy? It could be as simple as wanting to fund a camping trip or as lofty as wanting to buy a new car. Those short-term financial goals are best suited for regular savings accounts.
Ask your kids to consider long-term savings goals—where would they like to be in 10, 20 or 30 years? Do they eventually want to move to a different city, buy a house or have children of their own? Even if they don’t have a clear picture in their heads, it’s a good idea to get them thinking about the value of saving and investing for long-term goals early.
5. Don’t Be Afraid to Ask for Help
Probably the most important tip for those entering the workforce is that there are no stupid questions. We all start somewhere when it comes to our financial literacy, and it’s always best to ask for help if they’re unsure how to handle a financial situation or reach their financial goals. While you, as a parent, can be a great guide to your children, chatting with a financial professional can be a great chance to have a neutral party educate your children on best practices when it comes to managing their money.
We love helping young people set themselves up for financial success! Contact our office today for a free initial financial review.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2023 Advisor Websites.