High school and college graduation season provides a great opportunity for new graduates to increase their personal financial knowledge and experience. In the nearly 21 years that we have been in business, I wish I had a nickel for every new 50 to 60 year-old pre-retired client who said, "I wish we would have been smarter and more responsible in our 20’s and 30’s."
So when and where to start? That’s a hard question. The overriding principle for young adults to understand and practice is leaving within one’s means including saving for the future. Some would argue that this should start early in life including learning the difference between needs and wants and the economic principle that people have unlimited wants but limited resources so rational decisions need to be made. These lessons can be introduced in early childhood.
But the high school and college years and the immediate time period after college graduation are the best times for practical application when the emerging adult starts to receive their first paycheck and asks, "What is FICA and why are there so many tax deductions from my paycheck?"
High school and college can almost mark the transition between when children spend their parents’ money and start spending their own. Never underestimate the impact of a child using their own cash or debit or credit card versus using their parents. It is amazing how spending patterns can change!
Basic cash flow planning, prudent use of debt and insurance planning should come before learning about investments and picking stocks. (This is a whole separate subject, but I’m a major opponent of stock picking contests in schools.) Cash flow planning, the sophisticated term for budgeting, should start with essential expenses for shelter, food, clothing, health care and transportation followed by saving for short term reserves, emergencies and long term goals. Then comes discretionary spending for entertainment and other non-essentials. (This is where they have to decide if beer is a basic food group!)
Learning about debt can come the hard way from student loans and car payments, but it should primarily focus on avoiding credit card debt. When the time comes, learning about mortgages should happen before buying a castle.
We are happy to meet with our clients’ young adult children to help get them off to a good start. Feel free to contact us if we can be of help!