By: Phil Kernen
Congratulations on your kid graduating from college. While much of the heavy lifting in parenthood may be behind us, we can still offer valuable gifts and advice as we send our kids into the world. Below are three actions to consider that will help them start strong.
Set up a Roth IRA
Investors fund a Roth IRA with post-tax money, which differs from a traditional IRA or workplace retirement plan. Invested well, funds will grow tax-free, and future withdrawals will be tax-free. A Roth IRA also serves as an essential long-term tool to build tax diversification for retirement.
Roth IRAs have income limits, meaning those who make more than those limits cannot contribute. Eventually, career choices may push income past those limits, prohibiting further contributions. Over the first several jobs, your graduate will be nowhere near those limits, so take advantage of this window of opportunity before it closes.
Connect them to good counsel and advice
When you started your post-graduate life, you had questions that the classroom didn’t address. Should I sign up for my workplace retirement plan? Do I need insurance, what kind and how much? How do I find an apartment, buy a car, or create a spending budget? We sought out answers in our network of family, friends, or co-workers for every question. Some advice was good, some not so much.
If you know everything they need, let them know you are always available. In areas where you know less, introduce them to the professionals you rely upon and ask if they are willing to be a resource for questions and general guidance. Most will say yes. If gaps exist, identify them, point your kid to the logical resources, and encourage them to start asking questions. No one succeeds alone. Help build a group of trusted advisors who can guide your young adult toward thoughtful and well-reasoned financial decisions.
Encourage them to continue learning. Buy subscriptions to publications that focus on personal finance, such as Money or Kiplinger’s, or broader business publications like the Wall Street Journal or Barron’s. If they are willing to go deeper, buy them books such as The Millionaire Next Door by Thomas J. Stanley or the Wealthy Barber by David Chilton. The best combination is whatever will keep your young adult engaged and asking questions.
Transfer their new expenses
A 2020 report from Bank of America revealed that 79% of parents of early adults provide them with financial support. It estimates that parents of adult children annually spend $500 billion on them – excluding big-ticket items like weddings or first home purchases – twice what they contribute to their retirement. The most common are groceries ($54 billion annually) and cell phone service ($18 billion).
Instead, let your kids gain knowledge through experience to make educated financial decisions and earn the pride of building a life they can afford within their means. Instruct your graduate on expenses you have been paying on their behalf, which will become their responsibility. Many phone plans cover the whole family for a discount. If you want that plan to stay intact, request a monthly payment from your kid for their share of the bill. If you elect to keep your kid on your medical coverage or car insurance, do the same thing. The more they know about their responsibilities, the better financial choices they can make moving forward.