With so many young adults graduating high school and college this month, now is a perfect opportunity to have a conversation about finances. Your children and grandchildren look to you for guidance and expertise as they take on life’s challenges, why should finances be any different?
Below, we share five important first steps parents and grandparents can take to begin having the money conversation with your loved ones.
Opening Lines of Communication
Talking to your children and grandchildren about money can be awkward but avoiding the topic can be disastrous. Many parents are reluctant to talk about such a sensitive issue. This is even more true when the stakes are higher, like during a financially troubling time. Setting up your children and grandchildren with good financial habits when they’re young can save them—and you—considerable stress. Establishing these habits early on can make all the difference in terms of loan approvals, credit scores, student debt, mortgages, and more. There are several great opportunities throughout your child’s life to talk about money. The more open your communication, the less uncomfortable these conversations become. Last year’s economic turmoil can be a great introductory topic for establishing good financial practices.
Establishing Credit
Financial freedom also comes with responsibility. As your children and grandchildren begin opening up credit cards or taking out loans, they will need a well-established credit score. Talk to your children about when, how, and why to check their credit score. Make sure they understand the importance of paying bills and making payments on time, and the consequences of failing to do so. Discuss different interest rates and fees, and how these can affect their savings. For example, carrying a balance of $3000 for a year on a 20% APR credit card will result in paying over $600 in interest debt.
Investing vs. Saving
When your children and grandchildren finally establish a nest egg, their first thought may not be investing. After paying for tuition, housing, or car loans, it can feel unnerving to move it out of the bank. Warm them up to the idea by discussing the power of compounding. For example, if you put away $250 a month for 40 years, at 8% annual return, you would have over $872,000. If you did the same, but for only 35 years instead, you would have approximately $572,000. That’s $300k more for starting just 5 years earlier! If conceptual conversations aren’t resonating, you can also discuss the costs of not investing. Bring up other low-risk ways to invest and discuss how even relatively safe investments can add up to huge earnings over the long run, especially when compared to leaving everything in low-interest savings accounts.
Retirement Accounts
As your children and grandchildren begin to save, you should discuss the benefits of retirement accounts and employer matches. Investing just enough to qualify for an employer match can add up to thousands of ‘free’ retirement dollars per year. Other benefits that come with their first job can make a big difference to your children’s and grandchildren’s early financial management, like HSA or FSA employer contributions. You should also discuss other long-term retirement savings options, such as traditional and Roth IRAs. Make sure they know the difference between these two, as well as the tax benefits of opening a Roth account while they’re young.
Estate Planning
Be transparent with your children and grandchildren about what they can expect from your estate. Tell them about the importance of having their own financial plan as they age and grow their own assets and families. They should have a good idea about what will happen to your estate, property, savings, and other assets upon your passing. They should also begin thinking about their own estates as they age. You may want to encourage them to draft a will if they haven’t already or revisit theirs as their lives change. It can be a good idea to have your children and grandchildren talk to your financial advisor as they set up their own money habits. Having these conversations now can provide them with the necessary tools and expertise to create a financial plan that works for them.
As we celebrate all the graduates this month, it is our hope that this advice will help you and your families achieve your financial goals. We’re here to help as you consider your whole financial plan and future.
A Guidebook to Help Continue the Discussion
Whether you need to speak to your kids, grandkids, parents, or your partner, our guidebook, The Financial Conversations Your Family Should Have, can help you get these important financial conversations started within your family.
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Please consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation. The information in this article is not intended as legal or tax advice.
