Tips to Help Your College Grad Attain Financial Independence
Most parents would readily agree that what they want most for their children is that they become independent and successful in whatever path they choose. And young people who have just finished college are especially eager for independence. However, high rents and student loan repayments can make getting by on a first job's salary something of a struggle.
Some parents may consider offering their children some financial help to get them on a firmer financial footing. Others worry that offering their adult children money might diminish their sense of self-reliance. If you are a parent facing this dilemma, you may wonder if there is a middle ground. Here are some tips you may find useful as you determine the best way to help your child prepare for a financially independent life.
Give the Gift of Knowledge
Knowledge is power, especially when it comes to finances. If you help your child understand the importance of budgeting and of spending wisely, you are helping them exercise control over their financial life.
A budget is essentially a spending plan -- a way to help your child keep track of income and expenses. And a key aspect of a spending plan is setting priorities. That means separating budget items into essential and nonessential (aka discretionary) expenses.
Essential expenses are expenses that are nonnegotiable. They're the primary category in a budget because they must be paid. They include things like mortgage or rent, utilities, food, insurance, basic phone service, student and personal loan payments, and so on.
Nonessential -- or discretionary -- expenses are things that are nice to have but are not necessary. They include items such as premium cable and cell phone service, restaurant meals, and entertainment. Young adults should understand that when they need to have more money available to pay for essentials, cutting back on discretionary items can free up cash.
A key takeaway for your child should be that looking at where a paycheck goes and finding places to trim costs can leave more money to pay down debt, add to savings, or invest for future goals -- like buying a new car or a first home and funding retirement.
Emphasize the Importance of Maintaining Good Credit
Your college graduate may be carrying some student debt. Whether that debt is large or small, your child should be aware of the importance of making loan payments on time. Frequent late payments could have a negative impact on your child's credit rating and lead to higher interest rates on credit cards and auto and home loans. Take the same approach when it comes to credit card debt and emphasize that late payments can be costly over the long term.
College grads with student loan debt may be eligible for an income-driven repayment plan. This type of plan would permit your child to pay only a percentage of income towards paying down the debt. Another possibility is the Public Service Loan Forgiveness Program, which forgives student debt to graduates who work for government organizations or tax-exempt nonprofit organizations. Strict qualifying conditions apply.
Take Your Own Financial Pulse
Before offering financial assistance to a child, you'll want to first assess your own financial situation. Are you setting aside sufficient funds for your own retirement security? Do you have an emergency fund set aside to cover large, unanticipated expenses? Finally, check that you have enough life insurance in place so that your loved ones would be protected from financial difficulties should you die unexpectedly.
It is only when you feel that you are in a solid financial position that you should consider offering financial help to your son or daughter.
Offering Financial Support
Once you decide to offer your graduate some financial support, set limits and decide how long you will offer that support. For example, you might consider keeping your son or daughter on your health insurance until age 26. That may make sense if debt and essential expenses are making it hard for your child to afford health care premiums.
Or, if your child has to move to an expensive city for a job, you could help with moving expenses or a security deposit on an apartment. Even paying part or all of your child's rent could work for a short time if it helps your child become more financially independent down the road.
Talk to an Advisor
If you want assistance with determining how healthy your finances are and how much financial assistance you should be offering to your college grad children, a conversation with a financial professional may be of help.