There’s a lot that 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 here's one subject that’s often not taught in schools or discussed much in social circles: how to prepare your kids for financial independence. Luckily, there are skills you can teach them to help get them ready to take charge of their own finances. Here’s where to start.
GET THEM USED TO A BUDGET
It's a good idea to help your kids 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 teach them a few good rules of thumb to follow instead.
For instance, one easy way to think about budgeting is to spend no more than 60 percent of your paycheck on committed expenses. These are things that you can expect to pay each month like rent, utilities, food, and other necessary costs. Then, commit about 20 percent of what you have for savings. The final 20 percent is for whatever you want. While these are just guidelines, knowing them can help your kids start to instill good financial habits with the money they have.
HELP THEM CREATE A SAFETY NET
Hopefully your kids know they should start saving something for retirement. But it’s also good to talk about some simple things they can do to make sure they’re in a good financial position. Talk though:
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 they should devote some of their savings each month to build toward an emergency fund.
Retirement. 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. If they get a 401(k) through work, it’s a good idea to contribute at least enough to get any company match. Then as they make more money over time, they can slowly increase their contributions.
Insurance. They probably know to sign up for their employer’s health insurance, if it’s offered. But things like renters insurance and disability income insurance probably aren’t top of mind. These are typically relatively inexpensive when your kids are young, and they can make a huge difference in protecting their finances from the unexpected.
TEACH THEM 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 and credit card debt. It’s important to help them understand the difference between good and bad debt and how to use debt to their advantage, not their detriment.
Bad debt is typically high-interest debt that provides little long-term value. This would include things 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 you buy a home that’s likely to grow in value over time. Student loans help you get an education, which can increase your lifetime earning potential.
INSTILL THE IMPORTANCE OF GOOD 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, it’s good to teach your kids about their credit report and score and all the things their credit can impact. After all, when they have a good score, they’ll be more likely to qualify for better lending rates and loan conditions — and you won’t constantly 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 to 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.