Things Your Adult Children Should Start Thinking About
So, your child is an adult …
Between Twitter, Instagram and different ideas about money and retirement, it can feel like you’re speaking a different language than your adult children when it comes to finances and their futures.
While retirement may look very different to different generations from the FIRE (Financial Independence, Retire Early) movement made popular by the millennial generation to the more traditional age 65 retirement of generations before them, it’s important that young adults don’t turn a blind eye to their finances.
Here’s some practical financial guidance to pass along to your adult children to get them headed in the right direction:
- Establish an emergency fund. Before thinking about long-term investments, it’s important to establish an emergency reserve that will be available for unexpected expenses and possible job loss. You should generally plan for three to six months of expenses.
- Establish a budget. It’s easy to spend beyond your means when you’re just starting out and not tracking where your money is going. Start setting budget goals and gauging your progress.
- Know your debt. Evaluate your outstanding debt and understand the interest rates on each. Establish a plan to pay down your high-interest debt first. Pay off your credit cards each month to avoid excessively high interest rates.
- Take full advantage of your 401(k). Make sure you contribute enough to your 401(k) to receive the full company match. As you receive pay increases, raise your 401(k) contribution as well. It’s a great way to increase your retirement savings without altering your current lifestyle.
- Look at other retirement savings vehicles. Use a Roth IRA when you’re in a lower income tax bracket. Even though you don’t get a current deduction, these assets grow tax-free over your lifetime. Even if you’re not in a low-income tax bracket, you may still be able to take advantage of a backdoor Roth IRA, but it’s important to understand the rules behind this strategy.
- Review your health insurance options and decide based on your specific situation. You may end up saving yourself a lot in the long run with a little bit of research on the plans offered.
- Evaluate your need for life insurance. If you have someone who counts on you, you should make sure you have a term life insurance policy. Keep in mind that investments and insurance are two separate things, and insurance should be viewed as something to mitigate risk.
- Start investing. Compounding returns is meaningful. Understand that you have a long-time horizon and can afford to take more risk. The earlier you get started, the better you’ll be in the long run.
- Don’t feel the need to keep up with the Joneses. It’s easy to want to live the lifestyles of our friends, but everyone’s situation is different. Just because your peers are buying houses doesn’t mean it’s the right time for you. As your income increases, your lifestyle shouldn’t increase dollar for dollar. Make sure you’re increasing the amount you’re allocating to long-term savings over time as well.
Your adult child’s financial future might be the last thing on their mind, but it’s never too early to get them started. Talk to your financial advisor about how to get the conversation started.