Several of the people in our office have college-age children as do our clients, so conversations around topics to prepare us for when our children enter the work force full-time occur frequently. In general, we find that the young people want to be independent and are willing to learn what is necessary to make informed financial decisions.
The area that recent graduates have the most questions about is 401ks and other retirement plans: what they are, how they work, what a company match is and how much they should save? Our recommendation is generally to contribute enough to receive the full match, because why forgo free money? That leads to a discussion of Roth vs. Traditional contributions. The appropriate choice will depend on the income tax situation, and the answer may be 100% Roth, 100% Traditional or some combination of both.
Next, a discussion about budgeting. There are several online tools available to aid in the budgeting process. We have one that guides our clients step by step, and can aggregate all of their financial accounts together so they can be seen in one spot, and therefore, more easily tracked. It also has several informational videos for young people to learn the basics of personal finance.
What if their compensation package included a signing bonus? What is the best use for that money? Pay down student loans or save it for an emergency fund? Use it to decorate the new apartment? Buy a new wardrobe in honor of joining the work force?
Budgeting can lead to a discussion of debt. There is a widely used rule of thumb that student loans shouldn’t total more than your expected first year’s salary. This rule acknowledges that those students moving into a higher-paying field can afford to take on more debt, because they should have the wherewithal to pay it back. Our suggestion is often to set aside enough to cover at least 6 months of expenses in case of job loss or other unforeseen emergency. They can add the student loan payments to the budget and start chipping away at it monthly. If they apply the full amount to student loans they would lower the balance, but what would they do in case of an emergency or financial setback without a “cushion”?
While many young people rely on the internet to provide them with advice on virtually everything, it makes sense to talk to an understanding professional to get those initial questions answered. Opening up a line of communication can be valuable down the road as careers progress and issues become more complicated. Our advisors welcome the opportunity to counsel the children of our clients. We can provide basic information and online tools to help recent graduates navigate financial decisions surrounding entry into the work force, repaying student loan debt, budgeting and preparing for a successful adult life.
by Cheryl Sternasty, CFP®