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‘Millennials are the most debt-burdened generation in history.’ How to guide your
grown children toward financial stability.
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Money 101 for (Imperfect) Parents and Grown-Up Kids
How to guide your twentysomething to financial security
By Elizabeth Fishel and Jeffrey Arnett for Next Avenue
October 15, 2015
Credit: Thinkstock
Parental guidance about money matters can be worth its weight in gold to help
grown-up kids reach financial autonomy. Before launching young people into the
world of earning and spending, it’s wise for parents to share their financial knowhow: smart budgeting and financial planning; establishing credit and using it
wisely; handling student loans; getting the necessary health insurance and savvy
saving.
Of course, many parents have hardly led exemplary financial lives themselves, and
many were wounded deeply by the financial doldrums of the past decade-plus. But
even here your advice and experience can be valuable. If you’ve suffered financial
reversals in the course of your adult life—and who among us has not?—you can
provide the benefit of your hard-won experience so your children will not repeat
those mistakes.
As Emotional Currency author Kate Levinson puts it simply: “Being clueless about
money is no longer affordable.” Here are our guidelines for turning money taboos
into talking points:
Demonstrate Wise Budgeting and Financial Planning
Bringing up the B-word may make young eyes glaze, but before children leave
home, parents will do well to introduce some budgeting basics, particularly the
most basic rule of all: Spend only what you can afford. Suggest a trial-run of
tracking expenses for a month or so to compare income and outflow and see which
costs fall into which categories: steady costs like rent, utilities, insurance, food,
clothes and entertainment, and big-ticket items like tuition, a car, furniture, travel
and so on. Online banking sites provide an accessible way to make a habit of
tracking expenses as do websites (and apps) like Mint.com and Learnvest.com.
Setting spending priorities is a crucial building block for future financial planning,
and in the best case scenario wise budgeting will lead in that direction. Tracking
expenses will suddenly make trade-offs become clear: Spend $150 on dining out
each month, or eat at home more often and sock away that money toward student
loans (or a big splurge trip to Cancun)? For a young person who doesn’t yet know
about deferred gratification, this could be the time to introduce it.
While most twentysomethings do their banking and bill-paying online, it’s still not
a bad idea to teach the ancient arts of check-writing and checkbook-balancing
before they set off on their own. Also advise young people to shop around before
selecting a bank and setting up a first bank account. Compare monthly checking
and ATM fees along with overdraft or bounced-check charges and make sure that
comeons to get new student accounts are actually beneficial.
Treat Credit and Debit Cards with Caution
As Carmen Wong Ulrich reports in Generation Debt, Millennials are the most
debt-burdened generation in history: In 1970, the average credit card holder owed
$158; today that number has ballooned to $7,500, and younger folks owe a large
chunk of this debt. Particularly if their credit card debt is added to their student
loan debt, by their twenties, young people may be drowning in it.
There’s no better way to teach young people to spend within their means and stay
away from credit card disasters than to advise paying in cash as they go. If used
wisely, a credit card can be a convenience; if misused, it can turn into a sinkhole.
Since the 2009 Credit Card Act, credit cards are issued only to those over 21. For
parents who want to help teach responsible credit card use, some financial experts
suggest opening a joint, low-limit credit card with their 18- to 21-year-olds to
educate them to pay bills on time and help them build a good credit score. That
way, when they turn 21, they’ll be better able to get a credit card and rely on their
credit score as they apply for loans.
In any case, make sure that young people comparison shop for the best credit card
deal (ideally no or low annual fee and the lowest interest rate and late fees
available). With today’s credit card interest rates at a staggering 18 percent (and
punitive rates spiking to 25-30 percent for missed payments or charging beyond a
credit limit), the smart path to solvency—and to safeguard that important credit
score—is to pay each bill in full by the due date. Any missed payment can harm a
credit history and make it harder, if not impossible, to get a loan later on. Simply
paying the minimum required each month can turn out to be very costly over the
long haul.
Especially during their early twenties, when some emerging adults may not be at
their most responsible, a debit card may be a smarter choice than a credit card.
With a debit card, the funds are transferred immediately from a user’s bank
account, not deferred to be paid later on. And if a user tries to make a purchase on
a debit card without enough money to cover it, the transaction will be declined—
another stop sign to spending what isn’t there.
Be Smart About Student Loans
Some 70 percent of college students currently graduate with debt, and the class of
2015 has the dubious distinction of carrying more student debt than any graduates
in history: $35,000, according to an analysis of government data by Mark
Kantrowitz of Edvisors.
While all student loans need to be paid back starting after graduation, governmentbacked loans (also known as federal education loan programs) have some distinct
advantages over private loans. Government-backed loans (serviced by companies
such as Navient Corporation) don’t need to be co-signed by a parent, and they offer
a short, post-graduation grace period before interest payments start. After four
years of perfect repayment, the government will shave up to 1 percent off the
interest rate (a good savings on a 6 or 8 percent rate). Private loans do need a cosigner and interest charges kick in as soon as a student graduates.
Public Service Loan Forgiveness (PSLF) is a federal program, established in 2007,
to encourage young people to go into public service. For people in government,
nonprofit, and other public service jobs, this program cancels any student debt that
started in 2007 or after and still remains after ten years of making qualifying
payments. There are also federal loan forgiveness options available for teachers in
inner-city schools, nurses, and AmeriCorps and PeaceCorps volunteers.
With unemployment twice as high for emerging adults as for older workers,
another important federal program to know about is the Income-Based Repayment
program, available to student borrowers but not their parents. Updated by President
Obama in 2011 as “Pay as You Earn,” it caps monthly loan payments at 10 percent
of income each year (even lower for borrowers with low earnings), and forgives
any debt remaining after 20 years. This is a big deal for grown kids and their
parents who may have feared that a big load of student debt would gobble up half
the kids’ income for years.
Don’t Skimp on Health Insurance
In 2010 about 30 percent of Americans between the ages of 19 and 29 had no
health insurance and were one broken ankle away from a financial meltdown. But
today, thanks to the Affordable Care Act, young people can stay on their parents’
health plans until they turn 26, and 3 million of them have done so. After 26, if
they’re not covered by their employers, they can get reasonable coverage through
state health insurance marketplaces: 6 in 10 young adults will qualify for coverage
that costs $100 or less a month after subsidies.
If you can afford to help your 20-somethings cover this policy until (you hope)
they find a job that offers health insurance, this is money well spent. If you can’t
afford to contribute, make it clear that having health insurance is a top priority—
and required by law—even if your grown-up kid feels healthy as a horse right now.
It’s Never Too Early to Start Saving
Even high-schoolers can learn to start saving, and the good news from the College
Savings Foundation is that more of them are putting away earnings for college than
ever before, according to their sixth annual survey of sophomores, juniors and
seniors: 51 percent versus 44 percent last year and in greater amounts than ever
before; 83 percent have already put aside at least $1,000 this year, compared to 67
percent last year. That may be just a drop in the tuition bucket, but it can also be
the start of a valuable lifetime habit.
When young people start making a steady income and are able to cover their own
living expenses, they need to do several important things at once—pay off highinterest debt, build a rainy day fund and save for retirement.
The top priority, all financial experts agree, is getting rid of any high-interest-rate
debt they’ve built up, especially from credit cards. They need to put aside a certain
amount of money each month to attack that debt and stay at it until it’s paid in full.
And if it’s been a deep hole, cutting up the credit cards and paying for things
through debit cards or cash only may be the best long-term solution.
Although putting hard-earned money into savings may be a low priority for young
people in their twenties, financial experts recommend they set aside at least 10
percent of income to build a three- to six-month emergency fund. Retirement may
feel as distant as the moon in the twenties, but do give newly employed children
the “compound interest talk,” and encourage them to start saving for their later
years now. If they have a job with a company 401K plan, urge them to take
advantage of it, especially if the company matches their contributions (usually half
of every dollar they put in, up to a certain dollar amount). Although that money is
not accessible without a 10 per cent penalty until they’re 59 1/2, it will grow taxfree over the years—and be taxed only on withdrawal.
Yes, They Need a Retirement Plan
For those young people who can’t access a retirement plan through work, it’s still
smart to establish an IRA (Individual Retirement Account) and make annual
contributions to it—up to $2,000 per year. Even a smaller amount will accrue
nicely over the decades, and it’s also tax-deductible right now. It helps to set up an
automatic monthly deduction. Making these IRA contributions will build the
savings habit in young people and slowly start cushioning their old age. For
parents who probably won’t live to see their children’s retirement, it’s reassuring to
know they’ll have a good nest egg when their time comes.
If you find yourself grumbling about how the financial drain of parenting is lasting
much longer than you expected, take heart. Most emerging adults are striving
steadily to reach financial independence, and by age 30, most have at last emerged
into stable employment with a higher income (often combined by then with a
spouse’s or partner’s earnings). Like you, they look forward to the day when the
Bank of Mom and Dad can close its doors for good.
Until then, during these financially uncertain years, any judicious help that you’re
able to provide will enhance the likelihood that your emerging adults will flourish
in their twenties and beyond. As young people become adults it’s also good to be
reminded of the interdependence of all stages of life. Right now, you may be
stretching your resources both to assist your grown kids and to help out your
elderly parents with medical expenses, housing, or more. But one day you’ll be the
elderly generation, and your children will have learned from you how to give a
helping hand.
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