Encouraging your kids to dream big is one of the great joys of parenting. But helping them implement their plans so they become financially independent adults is harder. Here are key steps to take before your kids discover the top rated hotel of all time – Le Hotel Mom & Dad
- Talk about cost of living – college graduates can often relocate anywhere they choose. Cities like New York and San Francisco are great to live in if you can afford them. Two months of rent in San Francisco can often pay for an entire year in more affordable cities like Cleveland or Detroit. Before your kid pursues a dream job in an expensive city, discuss a budget and compare the cost of living in multiple places. If there’s a big gap between income and expenses in your child’s desired city, have a frank discussion of who will pay for that. Make it clear that credit card debt is not an option for shortfalls. If you want to cover the gap for your child, be explicit in how long you plan to do so. Having no limits will encourage your child to assume that you will always provide extra money.
- Go over how taxes work – many young people have no idea how much of their future paychecks will disappear after payroll deductions. Help your child estimate after-tax paychecks. That pre-tax salary may sound like plenty, but be hardly enough once it arrives in the bank. Explaining how far an entry level paycheck goes is essential if your kids are going to have a realistic expectation of paying for their post-graduate lives.
- Explore funded graduate school options – educational level has a huge impact on most peoples lifetime earnings. That’s why pursuing a graduate degree responsibly is an important conversation. Many kids are not eager to leave college and join the workforce. Some may assume a costly masters degree is a great next step. Make sure your child explores free or low cost options first. Many PhD programs offer full tuition and stipends for students (and some masters programs do as well). Many universities offer tuition benefits for employees your child could try out the work world by getting a university job, while earning a tuition-free masters degree.
- Encourage saving – if kids assume they can spend every cent they’re given, why would they treat a paycheck any differently? Set up savings or investments accounts for your kids and prompt them (a little nagging isn’t always bad) to move a bit of money to the account each month. Explain that this money will be theirs to help them through a rough patch or to buy something important in the future. This encourages kids to value financial independence and perhaps to even prefer it.
We all want the best for our children. By discussing how to transition into adulthood before the bills start piling in, you can help your child navigate life without you (or your basement) being needed every step of the way.
Jonathan Bernstein is a Senior Research Analyst within Hefren-Tillotson’s investment advisory group. Jonathan is a graduate of Yale College, a Chartered Financial Analyst charter holder (CFA) and a CERTIFIED FINANCIAL PLANNER certificant.
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