What’s one thing that people don’t typically want to bring up in casual conversation because it usually leads to some differing opinions? If you guessed politics, you came to wrong blog because the answer is finance habits! It seems so often that individuals feel that they shouldn’t talk about what worked for them to save, to stop over-spending, or to finally feel like they aren’t living paycheck to paycheck. These are all things to be very proud of and it is something that comes with time and experience. However, this topic should be worth discussing, especially with young adults starting out financially on their own. We want to bring awareness that these conversations can be crucial to “make or break” the bank so to speak once your child or grandchild flies the coop and is part of the working world. Here’s a list of some good topics to discuss with a loved one who is just starting out. Some might seem like common sense but all are fundamental steps to ensure financial success over time.
- Automatically save. It’s always easier said than done but choosing to save just a small portion from every paycheck adds up over time. One article uses the suggestion of saving 10% of your income. For instance, if someone receives a paycheck that’s $785.23 and move the decimal one point over, that person should be saving $78.52/paycheck. Just remember this isn’t the maximum amount an individual should be saving, it’s always good to do more if you’re able to.
- Don’t spend money on something you can’t afford. Simply put, it doesn’t matter how nice that apartment is that your child/grandchild wants or the dream car they would like to drive on their first day of work, those things will always be there and remind them that in time, they will be able to afford more luxurious things. We all know it’s probably wise to start with the smaller, not as fancy apartment or used car, but it’s normal for young adults to want fancy things, especially when social media shows a skewed perception of what people have. Remember to tell your loved one that what they truly need is something functional and reliable to get them through the first few years as he or she builds their positive financial foundation.
- Take advantage of free money. If their employer offers a match on their 401(k), take it! That may be the only time that they’ll receive free money and not have to pay it back.
- Credit cards don’t substitute as free money. What I mean is that everyone should always try to keep their monthly balance at a level where he or she can pay it off unless it is an emergency. One of the most common mistakes I have seen from my college friends is “I don’t need this or that but I want it” and they racked up their bill to over $1,000 (that’s a lot for a part-time working college student). To give some context, I’m just about two years out from graduation and they’re still paying off their credit card due to bad spending habits.
- Have a cash reserve. Remember #1? This is where that comes into play because your kid/grandkid’s good habits of saving 10% of their income will already give them a reserve in case the car breaks down or some unforeseen event occurs that makes them have to pay a chunk of change. A good rule of thumb is to have a minimum cash reserve that could cover 3-6 months’ worth of expenses.
After all those building blocks are in place, the next conversations could be about diversifying any savings above that cash reserve target. That could include opening a Roth IRA or a non-retirement investment account, but sometimes less is more. It can be overwhelming starting out so be patient with your child or grandchild as these things don’t happen overnight. Make sure they know the door is always open to talk about their finances and remind them of these tips when they seem to be digging a financial pit instead of slowly climbing the mountain of financial success.
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