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retirement

Setting Your Kids Up for Financial Independence

Unless you like the idea of a permanent boarder in your basement, you need to teach your children fiscal responsibility. Here are the most critical lessons you need to put them on the right path.

The term “boomerang kids” has, unfortunately, become part of the popular lexicon to describe grown children who leave their parents’ home only to return when they aren’t able to achieve financial stability as an adult.

According to the Pew Research Center, only about a quarter (24%) of young adults are financially independent from their parents at age 22. This is down from about a third (32%) of 22-year-olds who were financially independent from their parents in 1980. In addition, almost half (45%) of young adults between ages 18 and 29 currently receive financial help from their parents.

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Let’s talk about how you can set your children up for success to avoid having to support them into their adult years.

Start with Basic Budgeting

If asked, most parents would probably say that they want their children to be financially independent when they become adults. However, courses in personal money management aren’t taught at most schools today — so it’s usually up to parents to teach their kids the basic money management skills needed for financial independence.

This starts with showing your kids how to create a household budget. A simple budget lists all recurring monthly expenses on one side of the ledger and total monthly income on the other side. For most young adults living on their own, recurring expenses include rent or mortgage, utilities (water, power, trash, cellphone, cable), groceries, insurance and transportation.

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In addition to these basic living expenses, the budget might also include an allowance for incidentals or more discretionary spending like dining out, going to concerts or movies and other types of entertainment. You should stress to your kids that when they first start supporting themselves, they might not have as much money as they’d like for these kinds of “nice-to-haves.” This is a good opportunity to talk to your kids about the importance of self-sacrifice and delayed gratification.

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If the expense side of the ledger is larger than the income side, expenses will need to be cut to avoid going into debt. It’s usually easier to start by shaving incidental expenses — for example, eating out less, making coffee at home instead of buying it on the way to work, and not splurging on new clothes or electronics. If this doesn’t bring the budget into balance, your child might have to take more drastic measures, like moving to a cheaper home or apartment, getting a roommate (or two) or getting a less expensive car.

Using Credit Responsibly

One of the biggest obstacles to financial independence for many young adults is irresponsible use of debt. Many new college graduates receive tempting credit card offers from banks that make it seem like “easy money” is there for the taking. Unfortunately, some fall into the credit card trap and end up digging themselves into a deep financial hole that makes achieving financial stability difficult, if not almost impossible.

Therefore, it’s critical to teach your kids how to use credit responsibly long before they strike out on their own. Some topics you should cover with your children:

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  • As a general rule, you should not be paying for something on a credit card that you could not pay for today with cash from your checking account.
  • You should review a credit card statement together to show them the interest rate that will be charged if they only make the minimum payment and carry a balance from month to month. Explain how paying the balance in full every month before the due date avoids interest charges altogether, making credit card usage a wise financial strategy for many.
  • Credit cards should be paid off every month and should not be used to fund a lifestyle you cannot afford.
  • You should also explain to your children how using credit responsibly can help them build a strong credit rating. This is critical for young adults, since their credit score will impact everything from their ability to rent an apartment or buy a home. Also stress the importance of paying their household bills on time in order to boost their credit score.

Teach About Saving and Investing

In addition to budgeting and using credit wisely, it’s also important to teach your children about saving and investing. Doing so will enable your kids to benefit from a long-term time horizon for meeting important financial goals, like retirement or paying for their own kids’ college educations.

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Show your kids how participating in a retirement savings plan at work or opening their own IRA, if they don’t have an employer-sponsored plan, at an early age can help them secure their financial future decades down the road when they’re ready to retire. Also explain the importance of short-term savings — especially building an emergency savings fund to pay for unexpected things that occur, like car repairs and out-of-pocket medical expenses.

One common rule of thumb is to accumulate three to six months of living expenses in a liquid savings account that’s easily accessible. By having a stash like this to cover unexpected emergencies, your child could avoid racking up big credit card balances that make it hard to achieve financial independence.

Get Started Now

Setting your children up to achieve financial independence when they become adults starts long before they leave the nest. Sit down with your spouse now and talk about how you can start teaching your kids the kinds of money management skills they’ll need to be financially independent young adults.

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About the Author

Michelle Brownstein, CFP®

Senior Vice President, Personal Capital

Michelle Brownstein is the Senior Vice President of the Private Client Group at Personal Capital. She is a Certified Financial Planner with a wide range of Investment Management experience.

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