According to government sources that somehow know how to calculate these things, there will be around two millioncollege graduates receiving their diplomas in 2019. That's a lot of newbies heading out into the hard, cold “real world." What do you think is the most important factor in the lives of these newly-minted college graduates as they begin their journey through a life's work as a grad? Give up?
Money. Think about it. Why do they go to college in the first place? Yes, they want to learn. But why do they want to learn? They want to learn so that they can apply all or at least a portion of what they've learned to working for a living. It takes money to live. These days, it can take a considerable amount of money.
My words today are aimed at parents of new college graduates. I've been thinking about what my life was like when I was a new college grad and what kind of money smarts I took with me from the halls of ivy into the reality of employment, as I made my way through life with the money I was able to bring in.
This led me to recall some of the lessons my parents shared with me about how to handle money on my own, as an independent, parent-free individual. The truth is, they didn't offer me much wisdom at all, or if they did, I (most likely) wasn't paying attention. The first large portion of my post-college life dealing with money was essentially a trial-and-error process. The verdicts from some of those trials went against me, unfortunately.
When I received some ideas about the kinds of things parents should tell their new college grads about managing money, I made a note to share those ideas here with parents. The advice comes from the national nonprofit credit counseling agency, Take Charge America.
One of TCA's missions is to offer wisdom to help recent graduates embrace financial independence. That's a critical area and parents can play a key role in its success. As TCA notes, “Graduating college represents a pivotal point in any young adult's journey. While they may be far from the nest, parents can still help steer recent grads toward financial security.
“Making the first moves in their career or moving to a new city are probably at the front of any graduate's mind," says Michael Sullivan a personal financial consultant with Take Charge America. “While all of these changes are exciting, they need to start saving, avoid more debt and live within their means to truly become financially independent."
So, moms and dads, here are five conversation topics that can give your new grad the confidence and know-how she or he needs as they make their way from the classroom to the workplace and beyond. As usual, I'll add a few of my own comments to complement TCA's.
1. The Low-Down on Student Loans - Most student loans have a built-in six-month grace period, but this time goes by quickly. The faster the debt is paid down the better, as you avoid accruing more interest or late fees. Further, too much student debt can negatively impact your ability to qualify for other loans, such as an auto or home loan, stalling other post-graduate goals. You can help recent graduates research the best payment options for their individual circumstances....
Student loans, once again. While TCA's list of important topics on which to advise your graduate begins with student loan cautions, I'd like to be more proactive. Parents, your counsel on loans should begin when your child is in high school. As he or she travels across the (hopefully only) four years of college, borrowing from year to year, piling up debt, it may be too late for warnings about too much debt.
That's why I urge you to have a serious discussion with your child about which college to choose. Enrolling at a so-called “dream" school can become a nightmare if the loan debt is too steep. I realize that it's hard for a high school senior to look farther down the road to economic consequences, but addressing reality before college can sometimes be the better choice.
2. Budgeting isn't Boring - Gaining the independence that comes with graduating offers the perfect opportunity to learn more about budgeting. There are plenty of smartphone apps and other tools to keep tabs on how much money is coming in and going out. Getting a good grasp on a budget is the first step toward financial security.
When I recall my budgeting savvy as a new college grad, I remember my “mark on the wall" approach. The “mark" was my balance in the “wall" of my check book. I've always been impulsive, as are a lot of young people I know these days. What good is a budget going to do when you just have to have that new iPhone that costs a thousand bucks? You want that phone now!
Ha! If I were a new college grad wanting that expensive phone, I would rationalize getting it by saying, “I need it to run those budgeting apps!" Today, there are just too many temptations for young people to walk the straight and narrow path of budgeting expertise. The consequences of missed or late payments, student loans or otherwise, are long lasting. Hopefully, parents, you have provided your collegian with a strong positive role and displayed good budgeting skills yourself.
3. Everything About Emergency Funds - A safety net should be part of any budgeting strategy. This money is kept for true emergencies — when the car breaks down or for an unexpected hospital visit. Stash as much money away as your budget allows until you reach three to six months' worth of living expenses. Even $20 a month will add up over time.
This one challenges restraint and self-denial. A friend of mine always preaches, “Pay yourself first!" By that, he means we should put some money away for our emergency (contingency) fund before we pay any other debts. Back in the day, I tried to do this, but when I saw my checking account balance begin to climb, my impulsiveness would kick in and I would deflate it by buying something I had been eyeballing for some time.
While $20 per month can add up over time, it will take a lot of time for it to amount to something useful in an emergency. I would suggest advising your grad to save at least $50 per month, preferably $100. A hundred dollars per month in a year's time would provide a meaningful cushion. Emergencies don't come cheap these days.
4. Don't Forget Healthcare - It's required by law to have health insurance, so graduates need to include healthcare costs in their budget as well. While they might be on their parents' plan now, coverage ends on their 26thbirthday. Sooner or later, young adults will need to choose a plan according to individual circumstances, including what deductible and premium they can afford.
Healthcare plan choices aren't the problem. Paying for those choices is the problem. There has been so much volatility in the healthcare industry lately that obtaining a comprehensive plan can be a big challenge, even with a full-time job that offers benefits.
The federal government is a major factor in healthcare. What's going to happen with the feds' influence on that industry is anyone's guess and that makes planning difficult. One stopgap approach that parents can pass along is about short-term medical insurance coverage. Our family has used it a few times over the years. It's relatively inexpensive and can provide a needed safety net.
5. Credit Card Debt? No Thanks - Recent college grads are inundated with pre-approved credit card offers. But don't be tempted by deals that seem too good to be true. Having one credit card payment, paid off in-full every month, is the best way to establish a positive credit history. Emphasize that missing even one payment can result in fees and ding their credit score. Carrying a balance, too, can wreak financial havoc as interest adds to the total balance due.
This is golden advice from top to bottom. My wife and I preached the “pay it off in full every month" gospel to our son and daughter as they launched their independence. The temptation with credit cards, at least from my experience, is that at the point of purchase, it can all too easily seem like you're not actually spending any money because no physical cash is leaving your possession.
Another delusion is “I'll pay for this later." That's a sword with two edges. First, you may not have enough cash to pay in full by the due date. Then you'll rack up interest on the unpaid balance. Second, if you're caught extremely short of cash, you may have to miss a payment. This is when the sword's sharp edge cuts deep, with late fees, added interest and a damaged credit score. The lesson here, then, is: Don't be a fool; pay in full!
If we, as parents, have not set a good example for our children as they went from high school through college, then preaching the above financial good practices probably would appear to be hypocritical. However, even if your parental financial management has been subpar, consider discussing the above points with your new grad. We never know when some of our advice will stick!
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