Financial Education Is the Best Gift You Can Give Your College Grad
College can prepare young adults for the workplace, but for handling finances, not so much. According to the National Endowment for Financial Education, 76 percent of millennials lack a basic grasp of financial literacy.
If you're contemplating giving your daughter or son cash as a graduation gift, there's something just as valuable to give them – a crash course in money management.
Five financial lessons new grads need to learn
Teaching your graduate how to navigate money is a must as they prepare to head into the real world. Here are the most important things to cover:
- Budgeting and tracking spending
A budget is the most important financial tool young adults should have. It's simply a plan for spending, and without one, it's easy to overspend or end up in debt.
Unfortunately, 58 percent of millennials say they rarely or never plan their spending in advance, according to a Varo Money survey.
Sit down with your grad and explain how budgeting works. Go over the basics of:
- How to add up income each month
- How to add up monthly expenses
- What counts as a "need" vs. a "want"
Talk to them about tracking their spending each month and why it's important. Explain that to really keep a budget in line, you need to know where every dollar is going. If they balk at the idea of writing down purchases, suggest using a spend-tracking app like Mint or Wally, which can link directly to their checking account.
- Why savings should start sooner, not later
An emergency fund is something just about everyone needs, but too few young adults have. Forty-six percent of 18 – 24 year-olds have $0 in savings, according to a GoBankingRates survey.
Talk to your grad about why an emergency fund is important and what it’s meant to be used for. (Unexpected car repair = emergency. Last-minute trip to Cancun with friends = not an emergency.)
Then discuss including regular savings as part of their budget. Even if they only have an extra $25 a week to save, they can use that as a starting point. That amount, saved in a high-yield savings account with a 2 percent APY, would grow to more than $6,800 over five years.
Besides an emergency fund, you should also talk retirement savings. The single most powerful tool young adults have for retirement savings is time. Saving $100 a month in a Roth IRA starting at age 22 could grow to more than $366,000 by age 67, assuming a 7 percent rate of return.
Go back to their budget to help them find money they can carve out for retirement savings. And once they get their first job, talk to them about saving in their employer's 401(k):
- How contributing works and where the money goes
- How to decide what percentage of their income to save and how much of
a match they can get
- How and where to invest the money they're saving
- How to pay taxes
If you supported your new grad financially over the past year, you may still be able to claim them on your taxes. But eventually, they'll have to file taxes on their own.
When they get a job, make sure they understand the tax forms they're filling out, including any W-9 forms. It's also helpful to give them tips on how to read their pay stub. For example, they should understand the difference between gross pay and net pay, what's being withheld for federal, state, Social Security and Medicare taxes, and anything else that's being deducted for retirement account contributions, health insurance or other benefits.
Once it's time to file their taxes, go over their filing status, what the difference is between the standard deduction and itemizing, and what deductions or credits they might qualify for. If they're getting a refund, talk to them about their options for saving it or paying off debt, versus spending it.
- Managing student loans
The average grad leaves school with $37,172 in student loan debt, according to Student Loan Hero. If your grad has federal loans, there’s probably a grace period before they have to start paying on those loans. This is a great time to talk to them about choosing a payment plan and budgeting for their monthly payments.
For example, they should know that a standard 10-year repayment plan means their monthly payments might be higher but they'll pay less in interest over time, versus stretching payments out over 15 or 20 years. They should also understand how deferment and forbearance work if they need a temporary break from paying, and how that affects what they'll pay in interest for their loans.
- Starting on the right foot with credit
Good credit is essential for new grads as they get older and work toward financial goals like buying a car or a home. A LendEDU survey found that millennials are largely in the dark about how credit works or how to improve it.
As you discuss credit with your grad, focus on:
- What a credit report is and what's in it
- How credit reports are used to generate credit scores
- What a credit score is and why it matters
- What can help or hurt a credit score
You should also be talking about ways to build credit. A credit card is one of the easiest ways for new grads to get started. If they have a card or they're planning to get one, make sure they know that paying on time and keeping their balances low are important for good credit. And encourage them to limit how often they apply for new credit, since too many inquiries can hurt their scores.
Keep the conversation going
These are the most important things a new grad needs to know, but that doesn't mean the money discussion has to end there. As they get older, they may seek your advice about things like investing, planning for home buying, or saving for their own children's college years. Those talks can be a lot easier to handle if you've already helped them build a solid financial foundation.
All content and photo provided in this blog is supplied by Rebecca Lake and is for informational purposes only. Barclaycard makes no representations as to the accuracy or completeness of any information contained in the blog or found by following any link within this blog.
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