Over the next few weeks, thousands of students will graduate from high school and college with the promise of a bright future ahead of them. Up next is adulthood and living the American dream of … Debt. Lots and lots of debt, along with a heavy dose of financial confusion. Sadly, even a great high school or college rarely help students master personal finance so they can truly conquer the world.
I still believe college is a good investment for most people, but it does come at a price. Total outstanding student debt topped $1 trillion last year according to the Consumer Financial Protection Bureau. Certainly rising tuition and a lackluster job market don’t help, but I also believe many graduates are also simply unprepared to handle their finances. The good news there is an easy fix — you need to prepare your kids for life on their own. The sooner you start this the better, but it’s never too late to help your children master their financial life. Don’t force them to figure this out on their own.
Kids leave college eager to get a job, find their significant other, buy a home, start a family or essentially live the American Dream. However, the American Dream comes at a pretty steep price, so make sure your kids know how to navigate the financial world so they can create the life they want for themselves.
I’m not quite sure how this happens, but most students enter college with the understanding they will incur X amount of debt, but few have a plan to actually pay off their debt after graduation. They accept debt as being normal, which can be a dangerous mindset to develop.
Most graduates assume they will earn enough money to pay back their student loans with ease, which would happen in a perfect world. Unfortunately, this is not always the case, so figure out a worst case scenario too. If you can’t find a job or it doesn’t pay enough to cover your monthly bills, what will you do? Will you work a 2nd and 3rd job? Find a roommate? Or move back home? What can you eliminate from your budget? Even though it may seem unbelievable, beer is actually a “want”, not a “need”. š
My tip: Start saving to repay your student loans while you’re still in college. This can give you a Student Debt Emergency Fund to tap if you’re struggling to find a job or make monthly payments after graduation. A savvy college student might even ask Mom and Dad to match these funds contingent of them earning a certain GPA.
This is one the biggest missed opportunities that many people regret as they grow older. In 21 years as a financial advisor, I have never once had a client tell me they regretted investing early, but many regret not doing it sooner when they realized the lost opportunity.
The easiest place to get started is through your work’s 401k plan. I know it can be a bit overwhelming and retirement seems eons away. But right now, time is your best friend and thanks to the power of compound interest, you can grow an impressive nest egg.
What do you want to do with your life? Do you want to own a home? Do you want to get married and have kids? Do you want to travel the world? How will you leave your mark on this world? Yes, these are big-picture questions that you might not have the answer to at 22 but start thinking about what you want to do, so you can start saving your money to actually do them.
I don’t consider credit cards bad. They can be a great tool to establish excellent credit and a lifesaver when your car breaks down in the middle of nowhere. The danger in credit cards is that they make it easy to live beyond your means. Funding a lifestyle on money that is not really yours is incredibly risky.
Remember those goals you created? Those are things you’re working towards, so when you see something you want, ask yourself, “will buying this bring me closer or further away from my goal of buying my first house?” It’s okay to treat yourself to the occasional night out, but just be sure it’s not creating additional debt for you. Otherwise, it’s not really much of a treat.
Some people view frugal as being cheap. I think those are two very different mindsets. A frugal person is a conscious spender. Too many people buy things because they can without little thought as to whether they truly want or need it. A frugal person knows exactly what they want and saves for it. They don’t get distracted by the noise of advertisers or others telling them that they must have something that deep down they really don’t want. Nor do they believe the things they want make them better than others or entitles them to treat others poorly. They respect money and live within their means. They spend money on things that truly matter to them without creating additional debt in their lives.
I hope college was a truly a wonderful time for you where you created life-long friends and memories and also learned a few things too. š The real world is full of endless possibilities and opportunities but not having a strong financial foundation can prevent you from taking advantage of them. Don’t make that mistake. You’re an adult now and the decisions you make can bring you one step closer to living the life you haven’t even imagined yet. Welcome to adulthood.
How are you preparing your kids to enter the real financial world? What would you have done differently after graduating from college?
Shannon
The Heavy Purse Store is now open! My new downloadable Money Club Workbooks are now on sale. Each workbook provides five targeted lessons to help you raise Financially Confident Kids. Please check them out in The Heavy Purse Store.
SHANNON RYAN, CFPĀ®
I have to wonder if it is even worth the effort to get a degree these days?
Great tips Shannon! Invest in your 401K is a big one. When I landed my first job out of college, I didn't start my 401K right away, and I wish I had.
I heard about your site from the 2 guys and your money podcast.
Good tips but I wouldn't recommend doubling down in your 401k in this environment. Who know's what's going to happen in the next collapse it's coming. Cyprus?
It is so unfortunate that getting a good education costs so much these days and that so many people graduate and begin their careers so deep in debt. They hope that what they study will help them find a nice paying job, but it doesn't always work out that way, and then they find it hard to enjoy their life because for the first 10 years they are simply working to pay off their loans.
By the way, I love the you pointed out the difference between frugal and cheap. I think too many people confuse the two.
These are some good ideas for how to prepare for student loans. I know for myself, I didn't fully understand what I was taking on when I took out over $45,000 in student loans (I was a single parent at the time).
I thought in idealistic terms and had no idea I would be stuck at a minimum wage job for the first two years after graduating to build up "experience" to apply to more senior jobs. $9 an hour does not go a long way when your payments are $600 a month!
After I graduated, my mom was like, that's it girl you're on your own and I took it from there. I can't blame my mom because that's how it happened to her.
Now that it's my turn, I'm breaking that cycle because I want something better for my kids so I do take time to talk about money and saving whenever I can, especially now that they're teens.
My son just started his first job about a month ago and we were talking about his 401K. He just couldn't believe how much planning is involved.
It's funny as teens we want to hurry and grow up but when it hits us, we want to be a kid again :)
P.S. Thanks for calling out the difference between being frugal and being cheap!
Knowing your "worst next thing" is generally a good idea for people of any age. Once you have a clear image of your fears documented somewhere in your brain, you feel calmer and more determined. At least I do :)
I think he'll be one of the smart ones about money but it doesn't hurt to advise him now does it!
Thanks for this great post right at this particular time. I finally have a child in my life that is fixing to head out into the world. I'm so very proud of him too.
~Adrienne
Keep up the great writing, Jeff
The biggest problem though is that we do not take our student loan debt seriously enough. We sign the papers and move on. When those bills actually start coming in the mail after graduation, it can be really scarey. It's also an eye-opener for many. All of the sudden, we are on our own and have the equivalent of a house or car payment, without either in our hands.