How to Prepare Your Kids for Financial Independence

A lot goes into prepping for the day your children leave the nest. You want to make sure they have the right tools to begin making real-world decisions on their own. Between what you’ve taught them and what they’ve learned in school and from their peers, they should be ready to face the big world.

But one subject that’s often not taught in schools or discussed much in social circles is how to manage money. If you’re wondering how to prepare your kids for financial independence, consider this a financial checklist that will help you get started sharing financial advice for young adults.

Get them used to a budget

Kids should learn to track what’s coming in and going out of their bank accounts, but not everyone is detail-oriented enough to keep tabs on every transaction. That’s why it might be easier to introduce an overall budgeting framework to follow instead.

The 60/20/20 budget

Here’s one formula for making a budget: First, spend no more than 60 percent of your paycheck on committed expenses. These are things they can expect to pay each month like rent, utilities, food and other necessary costs. Then, commit about 20 percent of income to savings. The final 20 percent is for whatever they want, from entertainment to travel. While these are just guidelines, knowing them can help your kids start to instill good financial habits with the money they have.

Walk them through emergency savings

It’s a good idea to set aside three to six months' worth of expenses. This is money they can use for an unexpected big bill or if they lose their job. They don’t need to set it all aside at once (no one can), but devoting some of their savings each month to build toward an emergency fund can help provide peace of mind.

One place to consider stashing it is in a high-yield savings account, which offers a higher interest rate than regular savings accounts so the money has an opportunity to grow, while still being easy to access.

Introduce them to retirement planning

When you’re young and starting out, retirement seems so far away. But the sooner your kids start saving, the more time they’ll have for their money to grow via what’s known as “compound interest.” According to Northwestern Mutual’s 2026 Planning & Progress survey, Americans estimate they will need about $1.46 million to retire so it’s never too soon to start saving. Here are some basic types of accounts they should know about.

Explain the basic tax-advantaged retirement accounts

The most common retirement accounts are 401(k)s, offered through employers, and individual retirement accounts (IRAs), which anyone can open independently. In these accounts, money grows without being taxed each year.

There are also two kinds of each of these types of accounts. With traditional accounts, you contribute pre-tax dollars and will pay taxes when you withdraw the funds in retirement, while Roth accounts require paying taxes now so you can withdraw tax-free later.

If they get a 401(k) through work, suggest they contribute at least enough to get any company match. Then, as they make more money over time, they can slowly increase their contributions.

Acquaint them with taxable brokerage accounts

In taxable brokerage accounts, owners buy investments like stocks, bonds, mutual funds and exchange-traded funds and make money as their value grows. Anytime they sell any of these vehicles in taxable accounts at a profit, they’ll owe capital gains on the difference. The most reliable approach to investing is to buy a diversified mix of investments and hold them for the long term.

And no matter how enticing the “latest and greatest” investment opportunity may seem, warn them about the dangers of investing their hard-earned money in meme stocks, crypto and whatever other “opportunity” comes next. While any investment involves some degree of risk, their financial plan should be based on solid, proven investment vehicles.

Lay out the essential types of insurance

Until now, your kids have probably been on your insurance, so this is a good time to review the types of policies they should consider holding.

Health insurance

Most young people can access their employer’s health insurance, which may be cheaper than continuing to have them on yours. Remind them to check into the dates open enrollment is offered so they don’t miss an important deadline to sign up for coverage.

They may be offered a wide variety of health plan options so walk them through the difference between premiums (the amount you pay each month to have the insurance) and deductibles (the amount you pay out of pocket when you use it) to choose the plan that fits their needs.

Their employer may offer high-deductible health plans, which are often paired with Health Savings Accounts (HSAs), where they can set aside pre-tax dollars for medical expenses and can be invested and carried over, even to new jobs. Explain that HSAs are different than Flexible Spending Accounts (FSAs), which also use pre-tax dollars to fund qualified medical expenses, like prescriptions and dental care. However, they typically can’t be rolled over to the next year, which means they would forfeit unused funds.

Car and renters’ insurance

Car insurance is legally required in almost every state and covers damage or injury caused to others, plus optional coverage for the car itself.

Another type of insurance to strongly consider is renters’ insurance, which is often overlooked but surprisingly cheap, and protects personal belongings if they’re stolen or damaged. It can also cover them if someone is injured onsite.

Disability and life insurance

These may feel unnecessary for someone who is young and healthy, but that’s exactly why it’s a good time to get them, as premiums are lowest when you’re low risk. Term life insurance is the simplest starting point, covering the owner for a set number of years at a low monthly cost, with the option to convert term life insurance to a permanent “whole life” policy later. While whole life insurance costs more, they can lock in lower rates when they’re young. Because it builds cash value over time, the earlier they start, the more that value can grow.¹

Disability insurance may also not be on their radar, but the U.S. Social Security Administration estimates that a 20-year-old entering the workforce will have a one in four chance of becoming disabled before retirement. This insurance replaces lost income in the event of an injury or illness that prevents them from working.

Explain that not all debt is created equal

If your kids are like most young adults today there’s a good chance they have some (or a lot of) student loans and credit card debt. It’s important to help them understand the difference between good and bad debt.

Bad debt is typically high-interest debt that provides little long-term value, like credit card balances. Good debt tends to have lower rates and usually helps pay for something that will provide ongoing value. A mortgage, for instance, can help buy a home that’s likely to grow in value over time. Student loans finance an education, which can increase lifetime earning potential.

Offer strategies for getting out of debt

If they do have debt, assure them that it’s a normal part of most people’s lives, but the earlier they start to manage it the swifter they can get out of debt. Two traps to avoid are cashing out retirement accounts to pay for debt, as they’ll owe taxes and penalties plus lose out on years of compound growth. And caution them against payday loans which can have brutally high interest, perpetuating the issue.

A better path is debt consolidation, which rolls multiple debts into a single loan at a lower interest rate, which simplifies payments and can reduce overall interest outlay over time.

Teach them the ins and outs of credit

In addition to helping your children get their first credit card and passing on good habits, like paying their balances in full each month, explain how their credit report and score work, and why they are so important. For example, show them how to determine their credit score for buying a house as one goal to aim for and discuss the factors that impact it. Missing payments can do serious damage as can using too much available credit at any one time.

Good habits are key but so is limiting how often their credit is checked by potential lenders. A credit freeze is a free tool that locks access to their credit so an imposter can’t open new credit in their name. It can be lifted any time someone does need to check their credit legitimately.

Remind them that when they have a good score, they’ll be more likely to qualify for better lending rates and loan conditions—and (bonus!) you won’t have to co-sign loans for them.

Make a plan to wean them off your support

Your job is to protect your children and take care of them, so it can be tempting to support them financially when they ask for help, or offer cash for things like buying new furniture, paying off their student loans faster or renting an apartment in a better part of town.

If you’re in a position to help your kids and you want to, that’s great. But make sure you have a plan to transition them to being responsible for their own bills. And if helping your children will put your own financial future at risk, then you may want to think twice before offering to help. Remember, the less they ask you for $100 here or $200 there, the better they’ll learn to manage their own finances.

Organize your own financial legacy

Teaching young adults financial responsibility is one of the most valuable gifts you can give them. So is making sure your own finances are in shape for when you’re gone. Creating a basic estate plan (a will, named beneficiaries in your accounts, etc.) means your family doesn’t have to spend time and energy untangling logistics during an already painful time, and it also means more of what you’ve built will reach the next generation.

Share as many financial details with them as feels comfortable and either introduce them to your Northwestern Mutual financial advisor or encourage them to find one of their own to help them throughout their financial journey.