How do I steer my college graduate onto the right financial path?
We all want to make sure we have prepared our children for the challenges they will face at different stages in their lives. One of those challenges is being equipped to handle their finances after graduation. nHow do we do that? The answer is: making sure our sons and daughters have been educated on key financial topics.
Those topics are diverse and many: As graduates enter the workplace, they have to make immediate decisions—such as what money to withhold from their paychecks, whether to join their company’s retirement plans and what kind of health benefits to elect.
In addition, they may want to start budgeting for their financial goals by paying off student loans; buying a car; or saving for a home, a wedding or future children. Here, a credit history is key. And the fact is, most graduates have no credit history, and will need to develop a positive one.
By arming our children with the information they’ll need to get started, we’ll be giving them a practical foundation they can use throughout their lives.
WITHHOLDING AND BENEFIT ELECTIONS
New employees need to make decisions on how much money to withhold for taxes from their first paychecks. They also need to decide on benefit elections such as medical, life insurance and retirement savings. These decisions may impact them both immediately and in the long term. If they waive these benefits when they are hired, or delay making a decision, they may not be able to make a change until the anniversary date of their company’s plan year, or until they have a change in circumstances.
To get off to a good financial start, new graduates need to be educated on how to wisely budget their money. Have them track their spending over a period of time (such as a week or month) by categorizing that spending versus their income, and determining how and where they spend the latter.
Another suggestion is to divide their income into three categories; e.g., fixed monthly expenses, variable expenses and other personal expenses. Fixed expenses include ongoing monthly essentials such as rent, mortgage, groceries and utilities. Variable expenses may be items like donations, travel or entertainment. The balance of the graduate’s spending should be for items like saving for retirement, savings accounts and other investments and emergency funds.
DEVELOPING A CREDIT HISTORY
As mentioned, most new graduates will not have any credit history. They can start building a positive one by getting a credit card which is secured by a deposit they make, is a sub-card on another person’s (perhaps a parent’s) account or has a co-signer on the account.
These young people then need to develop healthy financial habits, such as paying their bills on time each month. If they have a credit limit on their credit cards, they should avoid spending up to the maximum allowed. In addition, they should keep credit card accounts open over a period of time.
In sum, we all want to make sure our children have the right financial tools to get them through life. Ensuring that we provide them with a solid foundation in basic financial skills after graduation will prepare them for the positive start they need.
This article is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. To the extent anything herein could be construed as tax advice, such advice is not intended to be used and cannot be used to avoid penalties under the Internal Revenue Code, or to promote, market or recommend to another person any tax-related matter. This information is general in nature and may be affected by changes in law or in the interpretation of such laws. The reader is advised to contact a professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.