Earlier this month I had the honor of being the commencement speaker at Penn State University, my alma mater.
As I addressed the business school graduates I reflected on my years immediately following receiving my diploma 15 years ago. What were my best lessons learned? How did I make the most of my financial life as a young adult? How could I have been better prepared for the financial twists and turns ahead?
It’s ironic. I majored in finance but none of my classes prepared me for my own personal financial challenges. This is the sort of stuff that, if we’re lucky, we might learn from those who are older and wiser.
So parents, if you have a child who graduated this year or is soon to leave the nest, take the opportunity to share some remaining financial wisdom that will serve them well in the years to come.
Below are some of the lessons I learned in my early 20s and financial advice money and parenting experts say is critical to give a young person as they enter the Real World.
Proceed with Confidence
Money is emotional. The topic can instill fear in some and cause us to avoid our responsibilities altogether. As parents with decades more experience, it’s important to share with your kids that money management, while it may not come naturally to us, is nothing to fear, says parenting expert and founder of Tools of Growth, Roma Khetarpal.
Instead, teach how to approach money decisions with confidence by doing research, asking questions and staying organized. “As with any personal relationship, in order to have a good relationship with money, you have to believe in its power and…work within boundaries and guidelines,” she says.
Know Your Numbers
Speaking of boundaries and guidelines, walk through your grad’s first year of income and expenses on a spreadsheet. Really see the numbers and help your son or daughter get a grip on how their money gets allocated on a monthly basis – and what is left (or not left) for miscellaneous expenses. Being able to visually see their income and expenses will help make their finances more real – and they’re less likely to overspend.
“Financial intelligence is gained through experience,” says Khetarpal. This includes both positive and negative experiences.
I learned very early on the importance of paying credit card bills on time when I accidentally missed a payment deadline. Even though I discovered and acted upon it quickly, the late payment set my credit score back a few points and was noted on my credit report for several years. I’m only grateful it happened when I was young and I had time to recover from the stain on my credit. It taught me the importance of automating my payments.
Get in the Habit of Saving
We all know that the sooner we begin to save, the more we can benefit from compound interest. But when I was young, I felt overwhelmed with the concept that I needed a 6-month rainy day account. The thought of saving so much money felt unrealistic and, as a result, I had a terrible time saving any money for the first few years out of college.
What I wish someone had told me was that it’s not how much you save that’s so important at this stage in your life. Instead, it’s better to focus on the habit of saving. You can start small but the important thing is that you stay consistent. Set aside as much or as little as you can each month automatically in both a rainy day account and a retirement account such as your workplace 401(k) or an individual retirement account. Once you feel you can save more, up your automatic contributions. But never neglect to save.
A good rule of thumb, says Beth Kobliner, author of New York Times bestsellers Get a Financial Life and Make Your Kid a Money Genius, is to tuck away 15% of your salary. If you can’t do that right away, start with less and work your way up to that goal within a year or two.
Take Student Loans Seriously
We may have gotten used to calling student loans “good debt,” but it’s important to teach young adults that student loans can turn ugly if payment deadlines go amiss. “College graduates today are coming out of school with more student loan debt than ever. Especially if your child has high-rate private loans, she should make paying them off a priority,” says Kobliner. She recommends that if your child is having trouble making monthly payments on federal loans, encourage her to look into alternative payment plans at studentaid.gov/repayment-estimator.
Don’t Wait to Invest
If your grad is fortunate enough to have access to a retirement plan through work (and better yet if the employer offers a match), insist that he or she participate as soon as possible. This is advice I actually do receive getting when I landed my first job – both from my father and my company’s human resources director.
While I was convinced I had no money at the time to invest in a retirement plan since I had student loans, credit card debt and my rent to worry about, they explained that I would hardly feel the pain. By automatically contributing out of each paycheck I wouldn’t really notice the allocation. But my retirement portfolio would thank me years later when I had saved more than $30,000 by the time I was 25.
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Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.