Tips for Making Sure Your College Graduate is Financially Savvy

College graduation means many young adults are embarking on a lot of firsts—first professional full-time job, maybe a first apartment, and often, the first time really handling budgets. This is a prime time for parents to talk with their kids about how to handle their finances, says Dara Luber, senior manager, retirement, at TD Ameritrade.

New Money Decisions to Make

Student Loan Hero notes 2019 graduates will likely be in a similar situation as the Class of 2018, which graduated with an average debt of $29,800, including private and federal debt.

Parents should talk to their graduates about paying student loan debt on time and why it’s critical to avoid a default. This is also a good time to bring up the importance of credit scores, Luber says.

If they have a job right out of school, parents can spend time help their children create a budget, focusing on fixed and variable costs, so they’re prepared with a plan to pay their bills, save, and also have a little room for fun.  

Luber says parents should encourage their graduates to sign up for a 401(k) if their company offers it, and contribute at least enough to get an employer match, to get them started saving for retirement. They may need help picking investments, so this might be a good opportunity to share some of your investment wisdom. Introduce your grad to the different asset classes, the importance of diversification, and how fees and taxes can eat into investment returns over time.

“Graduates should start saving when they're young and they have the power of compounding interest working in their favor,” Luber says. See figure 1 below.

Explain the time value of money—which can work in their favor in terms of savings, 401(k) plans and other investments—but against them when dealing with student loans and other debt. If graduates are financially able to save money in addition to a 401(k), help them set up an automatic savings plan to make it easier to put away money. Many financial advisors recommend new grads establish an emergency fund, and then set a savings goal of 10% to 15% of salary. For more on the power of compounding, watch the video below.

Lending a Hand

Some parents might want to continue to help their children financially after graduation, but it’s important they aren’t risking their own retirement to do so, Luber says. Parents can help with paying smaller bills like cell phones, or, if graduates are living at home, parents can help their children save in other, more creative ways.

“My dad said to me, you can move back home, but you have a choice. You can pay me $200 a month in rent, or you can put that money into an IRA (individual retirement account). Of course I put it in an IRA, and he taught me how to invest it,” she says.

That helped her get a start on a nest egg, she says. Luber suggests that new grads consider a Roth IRA, particularly if their jobs don’t offer 401(k)s. Roth IRA investors put in after-tax income, but the earnings grow tax-free, and the withdrawals aren’t taxable, either. This makes the Roth structure worth considering, especially for young folks with long investment horizons.

“Plus, their tax rate and income are typically lower when graduating college since they’re not making as much as they would at their peak earnings,” she says.

The transition between the lecture hall and the office, lab or other career environment can be one of mixed emotions—for both you and your young adult. Setting a few financial goals and expectations can help everyone navigate the flight from the nest.

Have goals of your own you'd like to work towards? Learn how easy it is to set financial goals or schedule a complimentary goal planning session with one of our Financial Consultants to get started today.