Teaching Money Smarts to Grown Kids Just because your son or daughter enters the job world doesn't mean that you are finally financially liberated. Unless you prepare your child for financial independence, you could find him/her back in the nest just when you're hoping to enjoy your own financial freedom. You can't order grown kids to manage their money wisely. But there are six steps you can take to help them get off to a good start... Set limits. For many graduates, coming home to the old, familiar bedroom and the fridge full of food is the obvious next step after college. It allows them to save on rent for a few months and to start building some savings. The key is in those three words—"a few months." Make it clear from the start that the time at borne is limited— six months maximum. Then set a firm move-out date, and charge a monthly rent if he stays beyond that date. The day may come when you must enforce this deal, so plan to be firm. Meanwhile, don't provide laundry services or cook dinner all the time as you might have in your child's pre-college days. Would you want to leave that comfort behind to share a small apartment? Urge your grad to pay off student loans as quickly as possible. Under-grads borrow nearly $20,000 in student loans, on average. One-quarter of graduating seniors who took out a loan borrowed more than $25,000, according to the College Board and the US Department of Education, By paying off student loans quickly, grads can avoid a huge interest burden. Example: For a $20,000 loan with an interest rate of 6.8%, repaying over a 10-year period would cost $230 a month, resulting in $7,619 in interest. Repaying over 20 years lowers the monthly payment to $154 pet month, but interest will total more than $16,500 over the life of the loan. Amid the excitement of graduation and getting started on a new life, student loans may be the last thing on your child's mind—but under financial aid rules, he is required to start repaying within six months after graduation. Recent grads should take advantage of the six-month grace period after graduation to consolidate student loans and lock in the current rate for the life of the loans. Your grad also may get another quarter percentage point off by signing up for automatic monthly loan payments to be deducted from his checking account. If a grad fails to consolidate within the grace period, the interest rate will be slightly over 7% for the coming year. Some lenders offer additional rate cuts after payments are made on time for 48 months. Go to www.finaid.com for details and calculations. Pay off credit card balances. Student loans aren't the only debt weighing on many young people (and their parents). Many expenses, such as restaurant meals, movies and sporting event tickets, pile up on credit cards. Grads end up with credit card balances averaging nearly $3,000. Now it's time to pay up—not add more debt, especially since annual interest rates for credit cards often are 20% or higher. Show your child that if he stops using the card and then pays just twice as much as the minimum payment every month, the balance could be paid off in less than three years. It's not an easy lesson to teach, so you may want to bring in outside help. Contact the nearest office of the National Foundation for Credit Counseling (800-388-2227, www.nfcc.org). The nonprofit organization offers free or low-cost counseling that is not just for those buried in debt. The counselors will help young adults manage their debt, set up budgets, plan for a good financial future and eventually figure out whether they can afford to buy a home. One or two sessions, by phone or in person, should be enough to help a young adult get started. Helpful: Today's tech-oriented kids may respond more readily to software than to your suggestions or those of counselors. Give a graduation gift of Quicken or Microsoft Money, financial software programs that can help manage accounts, pay bills, track spending and make budgets. Arrange for health insurance. Your college student was probably covered under your health insurance plan while he was in school, but that coverage likely expired on graduation day. Check your policy. If your grad already has landed a job with health benefits, there's nothing to worry about. If there's a gap of several months between graduation and starting a job, an auto or a skiing accident could cost a fortune in medical expenses if the grad is not covered by insurance. Many young adults feel invulnerable, but you know better—illness and injury are utterly unpredictable. Go to www.ehealdiinsurance.com, and click on "short-term insurance" to find a policy designed to protect against major medical expenses for six to 12 months. The site compares health policies within states. Alternative: You could opt for a COBRA extension, which would allow your child to stay covered under your policy for up to 36 months after graduation. This is helpful in cases where there is a preexisting medical condition that may not be covered by other policies, but it is expensive. In addition to the premium you were paying before, you must pick up your employer's share of the payments and an additional 2% fee. You must decide on the COBRA extension within 60 days after your child graduates. It is retroactive to the graduation date. Include a savings plan. Even though your grown child may just be making ends meet, it still is essential for him to launch a savings plan. That's especially true if he has found a job that offers a 401(k) plan and even more so if the employer matches some or all of the employee's contributions. If there is no 401(k) plan available, consider US Global Investors (800-873-8637, www.iisfun.ds.com). Its All-American Equity Fund (GBTFX) permits new accounts to be established with just $100—if the investor agrees to an automatic transfer of at least $30 a month to the fund from a checking or savings account. Best: Make It a Roth IRA so the money will grow tax free. (Your child can contribute up to $4,000 a year.) Buy a used car. Transportation to work may be a necessity, but a brand-new car isn't. If public transport isn't available, advise your child to buy a used car, which could save him thousands of dollars. If it's bought through a dealer, a warranty may be included. Check used-car prices at www.edmunds.com. If your offspring is financing the car, he shouldn't stretch out monthly payments for longer than three years, because by then, it may be time to get a newer car. Alternative: Suggest that he take over someone else's car lease at www.swapalease.com. People eager to get out of their old leases sometimes subsidize the remaining payments, providing a great deal.
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