Many of us have children graduating from college. You may want to provide some financial guidance for your graduates as they enter the workforce. If your grad has student loans, they should make regular payments, while following my recommendations outlined below.
First, start saving for retirement. If their first employer offers a 401(k) with an employer match, they should contribute at least as much as the employer match. They might also consider, while their income is lower, a Roth IRA which may be a better fit. A Roth is just like a savings account - no deduction going in, but at retirement distributions (with all the earnings) are tax free. Read the basic rules for a Roth before setting one up.
Second, maintain a cash emergency fund. This can be a modest savings account of $500 to $1,000 solely for emergency expenses – car repairs, medical bills, loss of job, etc.
Third, set up a budget before committing to any major expenses. Think of a budget in two parts: Fixed and discretionary. Fixed expenses are: Rent, Utilities, Telephone, Internet, Food, Gas, etc. - basically things they have to spend money on. Discretionary expenses are things like: Vacations, Restaurants and Entertainment. The budget should be based on net income, after taxes and retirement funding. Start by budgeting all of the fixed expenses. This will leave an amount left over that can be spent on all of those discretionary items. It may be discouraging to see how little is left over, but part of life is learning how to live within our means. As most adults realize, it’s hard to get back on track, once our spending is out of line with our earnings.
Last, avoid debt. Credit cards can be a very dangerous temptation for students and graduates. Carrying large credit card debts and not making timely payments can ruin their credit history. If credit cards are used, balances must be paid off each month, otherwise running balances will limit the ability to pay for fixed expenses and save.
Following these steps can set your grad on the right path and help them feel more confident about their finances.
The above is considered to be general tax/financial information and is not intended to be used as tax/financial advice. If you believe that any of the above applies to you, please consult with a tax or financial professional. See our Legal Statement.