Published by Scott Danek
There are a number of things that are really cool about watching your kids or grandkids grow and mature. Near the top of the list is graduating college, get their first ‘real job’, and starting to make progress building their financial future. This recently happened to us with our oldest, and there were a number of important takeaways, including these Top 5:
Use Your Own Financial Condition As An Example
Whether you are in a good, middling, or poor financial position, being honest about it as they begin their journey is important and can help them understand the importance of getting off to a great start. If you could have done better when you were starting out and find you are a little behind your goals at this point in life, that is all the more reason they should and probably will want to make good, sound decisions and start saving and investing for their future. If you’ve done very well for yourself, there is nothing wrong with that and stress how critical this type of planning early in life was to help you get to where you are today. The ability to educate one’s kids, take a cool vacation once in a while, and consider retiring are all excellent examples that they surely would want to create for themselves and their future family (i.e. YOUR grandkids. . .).
Keeping Up with the Joneses is a Fool’s Game
We live in a society and culture of commercialism and consumerism, and we all get programmed from a VERY young age that we need ‘things’ and ‘stuff’. That is fine when your buddy has a four car garage for his Match Box cars, but not so much when one is older and the four car garage comes with a mortgage. We also have all been ‘poor college students’ and at least vaguely can remember our first real paycheck and how it seemed like SO MUCH MONEY and now know it wasn’t. Then we get bombarded by credit card offers in the mail, and then, and then, and then. . .
As real as the temptation is to spend like there is no tomorrow, living beneath one’s means is probably at the absolute top of the list for long-term financial success compared to anything other than being a descendent of Bill Gates. Several top tips for just starting out with a real job include:
- Pay off your credit cards every month
- Never take as much of a mortgage as a bank will ‘give’ you
- Buy your car a couple-three years used, letting someone else eat the depreciation
- Consider an HSA qualifying high deductible health plan if you rarely get sick, and fund the HSA each month in case you do
- Don’t be afraid to rent for a while to make sure you are with the right company, in the right location, love your ‘neighbors’, etc.
- Start a second savings account and pay that ‘bill’ first each month by moving some of your net check to it as soon as you get paid.
Who Doesn’t Like Free Money?
Most likely your young adult’s first real job will come with a quality retirement plan, and in many cases it will be one that includes an employer contribution in the form of a match. A match is free money, and even if they have a mountain of college loans they should find a way to contribute at least enough to be matched. I always say, if the bank said they were out of toasters and gave you $50 for every $100 you deposited into your bank account, how often would you make a deposit? Probably until the bank got the toasters back in stock, right!?
Write Sen. William Roth of Delaware a Thank You Note (Go ahead, Google it or via Wikipedia. . . 😉
A young adult can do much worse than contributing to the Roth 401(k) ‘side’ of their company’s retirement plan. Of course, ‘Please consult your tax professional first’, but the Roth 401(k) could be one of the most powerful tools your young person has to accumulate assets for their retirement. Instead of contributing pre-tax and then being taxed in retirement on the entire account, contributing after-tax now means that all but their company’s contribution will be tax free to them in retirement and could be very meaningful. The next cool takeaway about making a mountain from a molehill explains why. . .
The Rule of 72: How to Make a Mountain Out of a Lot of Little Molehills
The Rule of 72 is one of the easiest ways to do math in your head and is Reason #1 why contributing ANYTHING toward retirement is worth it and ESPECIALLY if you are in your 20’s or 30’s. If you divide 72 by your assumed rate of return the result is how long it takes money to double at that rate of return. For example, if an investment averages 7% it would take roughly 10 years for the investment to double (72/7= 10 years). As an example, let’s say your young adult is 25 years old and wondering why it is so important to save that $50 out of their paycheck when they could do so many other things with it. Assuming it averaged a 7% per year rate of return, $50 saved at age 25 would be approximately $100 by the time they were 35, $200 by the time they were 45, $400 by the time they were 55, and $800 by the time they were 65. How cool is that, right?
Also, the way this relates to the thank you note to Senator William Roth is that if this 25 year old was contributing Roth after-tax, they’d be giving up the tax deduction on the $50 so that the $800 would be completely tax free in retirement. How many 25 year olds are in a high tax bracket where that lost deduction is critical, and who wants to pay taxes on $800 when they can pay tax on $50?
There are a number of other ways your child or grandchild can get off to a great start, but this is at least some food for thought as you sit down together and help them. Please forward this to them if you think there is a tip or two they might put to work for them.
Also, if you have a child or grandchild that you think would benefit from speaking to us please feel free to have them call us or if they’d prefer we can reach out to them. We love to help young people get off to a great start in life, never charge for an initial meeting, and often can get most if not all of their questions answered in relatively short order so we look at it as a way to help and possibly start a relationship, not charge a big planning fee.