17 November 2018

5 Money Lessons You Should Teach Your Kids

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Among the findings of the recent NerdWallet new graduate retirement study was this: Young adults who live at home for two years after college graduation can shave as many as five years off their expected retirement age. Want to help your kids have a choice in their post-graduation lifestyle? Lay a foundation so they're prepared to be financially independent. That means having tough conversations about financial priorities, the potential costs of college and the importance of saving for retirement. Here are five lessons you need to teach your kids before, during and after college to help them launch.

Start by limiting student debt 

A good rule of thumb: Hold total student loan borrowing to 50% to 100% of you expected first-year salary. To do that, college students should get a job rather than borrow to cover lifestyle expenses. Exhaust scholarship and grant opportunities before taking out loans. And the kicker: Be careful with school choice, which has the biggest impact on debt levels. And as your children get ready to graduate, make sure they educate themselves on all their student loan repayment options, rather than let the government pick the default plan.

Saving for retirement requires a plan 

Plenty of online tools and advice will walk your kids through figuring out how much to save for retirement. After that, you're ready to talk savings vehicles. If a 401(k) with matching dollars is an option, this is a short conversation: That match is free money, so the 401(k) should be used first. And payroll deductions for a 401(k) are a hassle-free way to get into the habit of saving. Otherwise, the best choice is often a Roth IRA. And here's some good news: A Roth IRA can be opened while in college (or, for the really ambitious, high school) as long as the student is earning income.

Your peak wage growth years are coming right up 

We often assume that the older we get, the more our salaries will increase. It's a good excuse to put off saving. But a recent analysis of Social Security Administration data by the New York Fed found that the bulk of earnings growth happens between ages 25 and 35. How handy, then, that those early years are also when savers can make the most of compound interest, which has a huge impact on a retirement account balance. Those who manage to bank their salary increases when they're young will have a much easier time building retirement wealth.

If you don't want to spend less, you have to earn more 

In this "gig" economy, there's no excuse not to have a side job if full-time work doesn't pay the bills. The options are virtually unlimited, but you may need to nudge your college grads in the right direction. A few suggestions: Become a ride-share driver. Rent extra space in your apartment on Airbnb. Use Rover or DogVacay to find pet-sitting clients, or Care.com to find babysitting ones. Rent out your belongings on Zilok, sign up to take on small jobs through TaskRabbit, become a freelance virtual assistant on Upwork, or write or edit content for Scripted. Part of this lesson involves some gentle reminders that this extra income should be used wisely: The idea isn't to pad an entertainment budget; it's to fund an IRA.

Financial basics will keep you on track 

Aside from increasing income as noted above, two other things can significantly improve financial security: a budget and an emergency fund. Maintaining the former will make it easier to fund the latter, as well as to find money to save for retirement. These days, a budget requires little effort, says Stephen Hart, a financial planner in Plano, Texas.

Click here to access the full article on USA Today.

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