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Budgeting

How to Help Your Adult Kids Save More Money

Encourage your children to pay themselves first, pick the best banks and start investing. You can offer them a cash boost, too.

Moody's Analytics chief economist Mark Zandi made news recently when he reported that the millennial generation is the only age cohort with a negative savings rate. A flurry of media reaction followed, and one news outlet asked me what parents could do to encourage their adult children to save more.

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First off, it should be pointed out, as Zandi did, that it's not unusual for people in their twenties and thirties to have a negative savings rate; so did the baby boomers at the same point in their lives. Millennials had the added misfortune of entering the labor force during the Great Recession, when jobs were scarce. And student-loan debt has been an extra burden.

Still, given that this is America Saves Week, it's appropriate to offer advice on how young adults can boost their savings and what parents can do to help.

Make saving automatic.

Setting money aside from your paycheck (or, better yet, having your bank or your employer do it for you) is the best way for anyone to save, regardless of your age or income. If you don't see it, you can't spend it. This could mean contributing to your 401(k) plan as well as adding to a fund for a shorter-term goal. A young couple I know are setting aside $70 per paycheck to pay for a vacation next fall.

Get the biggest bang for your buck.

It would certainly encourage saving across the board if you could earn more than a pittance on your money. It doesn't appear that short-term interest rates are going to rise significantly anytime soon. But at some online banks you can find savings accounts that pay 1% or more.

Max out on tax breaks.

Money that you don't pay Uncle Sam is money that stays in your pocket. For example, if you're paying off student loans, you're entitled to deduct $2,500 in interest even if you don't itemize—and you may take the deduction even if your parents pay the interest. (See Most-Overlooked Tax Breaks for New Grads.)

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If you're expecting a baby this year, file a new W-4 form with your employer to claim an additional withholding allowance. If you're in the 25% tax bracket, that could boost your take-home pay by about $83 a month. (See Most-Overlooked Tax Breaks for New Parents.)

Take some risks.

In a report released last year by Bankrate.com, Americans chose cash accounts as their favorite long-term investment. Young adults were more likely to choose cash than any other age group: 39% said cash was their preferred way to invest money they don't need for at least 10 years, compared with 25% of the overall population.

Their caution is understandable, given the lingering wariness about the stock market despite its long bull run. Nevertheless, stocks offer the best opportunity for long-term rewards, and it doesn't take a huge sum to get started. Charles Schwab offers index funds with minimum initial investments of just $100, and you can open a brokerage account at Schwab with $1,000—or with no minimum, if you agree to add $100 each month automatically.

Use the Internet and financial apps.

Budgeting sites such as Mint.com let you set savings targets and monitor your progress, giving you a psychological lift.

Parents, be creative.

You can give your adult kids a leg up on saving without handing over money directly. For example, you could offer to match their 401(k) contributions, or help fund an IRA. To set up an IRA, the kids need to have earned income from a job, but the contribution itself can come from any source.

If you're looking for a meaningful gift for a graduation or wedding, consider giving a sum that your children can use to pay ahead on their student loans. Even a relatively small amount can result in significant savings on interest charges over time. Or you could help fund college savings accounts for your grandchildren.

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