Another crop of high school graduates has been harvested. Many will head to college, trade school, a first job, or the military, while some may elect to take a gap year in the hopes of finding clarity. Regardless, all will move towards independent adulthood. Consider giving your graduate the gift of financial wisdom; it will outlast many conventional presents and serve your child well in the years to come.
While this post was written with the typical high school graduate in mind, these tips can be adapted and applied to younger teens, and emerging adults. And, well, to you and me. Our clients often allow us to facilitate these conversations.
We’ve organized these tips into three general topics: cash flow and accounting; asset protection; and taxes, savings, and investments.
Cash Flow & Accounting
- Budgets – It’s likely your graduate has limited knowledge of actual costs for things like food, insurance, utilities (including the ever-important cell phone), rent, transportation, etc. A simple spreadsheet, or even a paper napkin, is all you need here.
- Banking – Perhaps your teen has already had their first bank account or been required to take a financial literacy class. Regardless, it’s important to reinforce the concepts and provide practical assistance with understating bank statements and fees. Help them download their financial institution’s app and make sure they know how to navigate the system. Set “low balance” or other alerts to head off potential issues. Instill in them the importance of checking their statements and reviewing charges (particularly important if they have a debit card issued).
- Mobile Payments – Establish limits for mobile payments. Apps like PayPal, Venmo, Square Cash, and Apple Pay serve a purpose, and many teens are more adept at using these than their parents. But instant money transfers come with risks. And mistakes can (and often do) happen. Enter one wrong digit in someone’s phone number or email address and they’ve paid a total stranger. If your teen makes use of mobile payments, help them set up two-factor authentication and a PIN to protect their account, and research the most secure way within the app to verify the identity of the person they want to pay.
Asset Protection
- Identity Theft – Talk to your child about their passwords. Using long, complex passwords and not reusing the same passwords on multiple sites are easy ways to keep their accounts from being compromised. Password management systems can help them keep track of their accounts and private information so that they don’t need to keep slips of paper in their wallet or lying around their dorm, etc. A Social Security card should never be carried in a wallet, although it’s tempting, as employers and doctors may need it. Have them memorize their number, or add it as a secure note in their password management system. Just be sure that the password for the system is unique and complex! See the “Credit Freeze” tip below for related identity theft information.
- Medical Insurance – While your child can remain on your health insurance policy until they turn 26, many may not have had to navigate the system of medical appointments, co-pays, and where to obtain routine as well as urgent and emergency care. It’s time to have the conversation about how their plan works, how to make an appointment, what costs they may be responsible for (even if you plan to cover them, they will still need a way to pay for services at the time of their visit), how to fill a prescription, and how to manage their medication schedule if they have one. Be sure they have whatever medical and/or prescription drug cards they’ll need. Be sure to research if the doctors and facilities they’re going to will take their insurance. If they’re headed to college, it’s likely that there’s a campus health center, but it may not accept all insurance policies. Some will cover full-time students for a small co-pay as part of a mandatory student fee, some won’t.
- Insurance – If your teen is currently a covered driver on your own auto policy, that status will change if they’re moving out on their own. Even temporary residence for college will have an effect on their coverage. Be sure to talk to your insurance agent about liability coverage if they’ll be living in a different location for a while. It may be tempting to remove your college student from the family insurance policy while they’re on campus. You may want to reconsider, as it’s not uncommon for people to drive their friends’ cars. Be sure that you understand your policy and restrictions. If your kids will be striking out on their own (at least until they move back into your basement), they’ll need their own insurance policies. The cost for this can be an eye-opener. Refer above to the tip on budgeting.
- Another type of insurance you’ll need to consider is renters’ insurance. Landlords sometimes require it. Even if it isn’t required, renters’ insurance can be a good idea if your graduate has expensive items that they’ll take with them: ie a road bike, computer, tablet, television, stereo equipment, cell phone, etc. While your homeowner’s insurance might extend coverage to your on-campus child, a standalone policy might make more sense, as it typically has lower deductibles. Check with your agent.
- Credit Freeze – Child identity theft is on the rise. But thanks to a new Federal law, you can now freeze your child’s credit file. Identity theft of a child can be particularly damaging, as it may be years before it is discovered. Equifax, Experian, and TransUnion have begun allowing people under 18 to freeze their credit files. Certainly, those 18 and over should consider this as a security measure, too, to help prevent identity theft. It may make getting a new credit card or loan more cumbersome, but it’s an excellent way to stop impersonation.
Taxes, Savings, & Investments
- Form W-4 – Eventually, your graduate will get a job (halleluiah). Employers will require them to fill out a W-4 form indicating their withholdings. Help them understand what taxes they’ll pay, and show them how to use the IRS calculator to help them determine the correct amount to withhold. Revisit this after they receive their first paycheck. They can always ask their employer to revise this if too much or too little seems to be taken out. They will also need to understand whatever passive income they receive from investment accounts that were given to them.
- Authorized User Credit Card – You can help your child build good credit (provided you yourself have good credit) by obtaining an authorized user credit card in their name on your account. Even if they never use their card (and perhaps it’s best hidden in a drawer), your timely payments will accrue to your child’s credit report, which is likely blank. Check with your credit card company for terms.
- Retirement Account – The sooner you start saving, the more you can benefit. A Roth IRA is a great way for them to start saving money that will grow tax-free and not be subject to income tax once withdrawn. Long-term planning may be a foreign concept to some young people. Help them to understand the concept of compound interest and returns over time. Matching funds may be a great incentive to earn more.
Please read The New York Times’ article for additional information and for specific tips for college-bound graduates and those enlisting in the military.