One of the questions our team is frequently asked is “how do I educate my kids about money?”.
For many, wealth planning involves preparing your heirs to be good stewards of your wealth and to carry on your legacy after you’re gone. Furthermore, it is most parents’ hope that their children will grow up making smarter decisions than they did, and perhaps avoid some of their own mistakes. The goal of this series is to help educate the next generation on the most foundational pieces of wealth planning and to create a launchpad for your family to discuss values surrounding money.
When we talk to our clients and their families about financial literacy for the next generation, we find it useful to break down the conversations into four life stages:
1. Grade school
2. High school/early college
3. Finishing college/early career
4. Building a family (marriage, children, etc.)
This post will focus on the third group – children finishing college or just starting out in their careers.
The three tools we recommend for this life stage are:
• Budget
• Emergency Fund
• 401(k)
The best place to start is establishing a budget –this will allow your newly-independent child to know exactly what kind of apartment they can afford, what kind of car they can drive, and even the amount of “fun money” that they can spend on entertainment. This is a key step that can help prevent overspending and overextending on lifestyle choices and help guide savings efforts.
Once your child has a budget for when everything goes according to plan, you also need to talk about preparing for the worst. Therefore, our next recommendation is a 6-month emergency fund. This should be able to cover 6 months’ worth of fixed expenses (rent, utilities, car, and anything else that must be paid on a regular basis or there would be trouble). This is designed to bridge a gap in income, such as in the event of an injury or illness, or unexpected unemployment. Having a 6-month emergency fund helps give a sense of peace and ease knowing that if something happens, it doesn’t automatically mean taking on undue debt or disrupting other financial planning (such as retirement money). Building up that readily accessible reserve is one small way your child can keep themselves on track, even through difficult times.
Lastly, we recommend that everyone take advantage of their employer’s retirement program. These can be called many different things depending on the employer, but the most common is the 401(k). Although young inexperienced investors are not always provided with sufficient guidance by the plan sponsor, we cannot emphasize enough how impactful it is to start participating as soon as possible. The power of time and compounding, tax-deferred growth means that the sooner your young adult starts saving for retirement, the easier it will be for them to achieve their goals. In addition, many employers will offer a contribution match – for example, if the employee contributes 3% of each paycheck to their 401(k), the employer will kick in that same amount as a benefit. We always recommend contributing, at minimum, the match rate. Anything less than that is like leaving free money on the table. A good target for saving is 10-15% of salary, so doubling the impact of your contributions can go a long way in making that attainable. Every 401(k) and employer-sponsored retirement program is different, and we are more than happy to sit down and help decipher plan documents and the options inside the plan.
We hope this has provided useful information about how you can help your newly independent child hit the ground running. If you ever have questions or want to discuss how to implement these tools, don’t hesitate to contact Amanda at 414-644-0061 or amanda@oharewealth.com.
Disclosures:
When Steward Partners provides investment advice to you regarding your retirement plan (“Plan”) account or individual retirement account (“IRA”), we are fiduciaries within the meaning of Title I of the Employee Retirement Income Security Act (ERISA) and/or the Internal Revenue Code, as applicable, which are laws governing retirement accounts. The way we make money creates some conflicts with your interests, so we operate under a special rule that requires us to act in your best interest and not put our interest ahead of yours. On December 15, 2020, the Department of Labor (“DOL”) issued their final interpretation of who is a fiduciary under ERISA and the Internal Revenue Code as well a new class exemption, Prohibited Transaction Exemption (“PTE”) 2020 -02. PTE 2020-02 requires fiduciaries to comply with the impartial conduct standards which are:
1. The fiduciary must provide advice in the “Best Interest” of the Retirement Investor
2. The fiduciary must charge “reasonable” compensation for the services provided
3. The fiduciary must avoid misleading statements about investment transactions, compensation, and conflicts of interest.
Please see important disclosures and information about our products, services and conflicts of interest, in the Client Relationship Summary, Supplemental Disclosures, and Form ADV; all of which are available at https://www.stewardpartnersis.com/Regulatory-Information-&-Disclosures.10.htm.
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