Kids Leaving the Nest?

It may seem early, but as young adults leave school and enter the workforce or post-secondary education, NOW is the perfect time to talk to them about planning for their retirement and potential financial emergencies. Here are a few discussion points to help you get started.

College freshmen move into dorm.As young adults enter into their careers, talk to them about starting to save early for retirement and the importance of preparing for financial emergencies.

Here are a few discussion points you can use.

Save and Invest with a Roth IRA

  • If your children have jobs, encourage them to open Roth individual retirement accounts.
  • Explain that interest in a Roth IRA grows tax-free for life.
  • Experiment with different amounts of savings and interest rates. Use a compound interest calculator at investor.gov.
  • Use the "Rule of 72" to estimate how many years it would take to double your money. If you invest in an account that earns 8 percent interest, you'll double your money in nine years (72 divided by 8 is 9).
  • Explain to your children that once they start a job, they may be offered a similar account at work called a 401(k). In a 401k, they can deposit pre-tax dollars through a payroll deduction. Some employers even provide matching contributions. The money in the account generally won't be taxed until it's withdrawn.

Consider Risks and Annual Expenses

  • Invest in an IRA or a 401(k) as soon as you have some income.
  • Putting all your eggs in one basket can be a risky way to invest; consider a diverse mix of stocks, bonds, and cash.
  • Compare mutual fund costs: An "annual expense ratio" of 1.5 percent instead of 0.5 percent on a $1,000 investment could cost you almost $2,000 over the course of 35 years.
  • Ask about index funds, which tend to have low annual fees.
  • Think about your goals. Attending college? Buying a home in 10 years? Purchasing a car in five? Define two financial goals for the long-term future, and make a plan to achieve them.

Save for Emergencies

  • Financial emergencies will happen; it's only a matter of when. Be prepared by starting a savings account to handle repairs, replacements, sudden trips, job loss, etc.
  • Some experts suggest saving three to six months' worth of expenses. If this seems too difficult, start by looking back at some recent financial emergencies. Set a savings goal you think will meet your urgent needs. When you reach that goal, aim higher.
  • Keep your money in a safe place, like a federally insured bank or credit union.

Establish Good Credit Habits

  • Even if you don't need loans to pay for college, sooner or later you will probably need to borrow money. Your borrowing and repayment history is tracked by the financial industry to create your credit score, which helps lenders gauge whether you are a good credit risk. The better your credit score, the easier it will be for you to borrow money and the better terms you will be offered. A good credit score can save you thousands of dollars over your lifetime. Here are some ways to build and maintain a good credit score (typically a score of 700 or higher) and avoid financial headaches:

  • Always pay your bills and loan installments on time. To avoid late fees, note the due dates for bills and installments as soon as you receive them. Keep a copy of all bills and loan payments you make.

  • Don't bounce checks. Bouncing a check means writing a check for more money than you have available in your account. Aside from hurting your credit score, banks usually charge you a fee for every bounced check. The fees are automatically charged to your account, which can cause subsequent checks to bounce, leading to more fees, more bounced checks, etc. Bounced checks can lead to real money problems and even get you into legal trouble. The good news is that with a little caution and diligence, you can prevent bounced checks altogether by being aware of the amount of money in your bank account and spending only what you can afford.

  • Use credit card sense. You'll get tons of credit card offers as a young adult. Your best move? Shred them. Don't sign up for a credit card just to get something for free. As attractive as easy credit might seem, credit card interest can put you in a very deep financial hole that can take years to dig out of. If you feel you need a credit card or you want to start building your credit history, apply for one credit card with a competitive interest rate, then charge only what you can afford to repay. Also, try to pay the balance in full each month to prevent interest charges from piling up.

  • Don't ignore credit problems, get help ASAP. In spite of your best intentions, you may get in over your head. Credit problems include missed payments, bounced checks, and credit card debt; these problems lead to a lower credit score and a more difficult time when borrowing money in the future. Sometimes, people mistakenly believe that if they ignore their credit problems, these problems will go away. Instead, their credit problems will only get worse. If it happens to you, don't feel foolish or ashamed, because you will be in good company; many well-intentioned people get into credit trouble. So get help immediately, nip credit problems in the bud and save yourself lots of stress. Your local financial institution or college financial aid office may be valuable free resources to help you get back on track.