If you’re a parent with kids in their 20s or 30s — or any kids at all — you’re probably no stranger to worrying about their future, including their financial future.
As you watch your now-adult children venture out into the real world, though, you may see them focusing almost entirely on their financial needs in the here-and-now — paying the rent, determining just how much health or renters insurance they can afford, etc. While learning how to manage their financial needs now is important, though, they also need guidance about how to secure their future.
There are certain underlying principles you can teach your kids now that, if followed, will help them secure financial independence in another 30 to 40 years. As a financial adviser, I have witnessed firsthand how people who approach their finances as a decades-long discipline will find themselves in great shape as they approach retirement. Conversely, those who bounce through life hoping things will somehow turn out all right might find their twilight years challenging.
The following are my top 10 savings tips you should be teaching your adult kids now.
Written by Jamie Letcher, a Financial Adviser with CUNA Brokerage Services, located at Summit Credit Union in Madison, Wis. Summit Credit Union is a $2.7 billion CU serving 163,000 members.
1. Understand the time value of money. It is the most important asset you have.
I sat my two kids down, ages 17 and 21, and explained if they contribute $5,500 to a Roth IRA every year for 40 years and earn a reasonable 7% return, they will amass a $1.2 million tax-free nest egg. Put it off for a decade (meaning they saved the same amount for 30 years instead), and the total is only $556,000 — those extra 10 years can make a world of difference. Indeed, what your child does in their 20s to plant a seed is crucial to where they will find themselves come age 60.
This is a hypothetical example used for illustrative purposes only and does not represent an investment in any specific product. Investment return and principal value will fluctuate with market conditions so that, upon redemption, the investment, including the principal value, may be more or less than originally invested. Illustration does not account for any fees, charges or taxes.
Sponsored Content
2. Apply rigor and discipline to saving.
If all your Millennial can save to a retirement account is 3% of their income, they should do it, and bump it up 1% every year thereafter until you reach an IRS-mandated maximum (currently $18,500 per year for 401(k)s for those under 50; however, they’ll want to keep abreast of how this maximum may change over the course of their working years). Incremental steps make a huge difference over the course of 30 to 40 years.
There will be periods when they have to back off on savings, but with rigor and discipline, they can build back to the goal.
Sponsored Content
3. Build an emergency fund for unforeseen events.
Best practice is to keep six to nine months of living expenses in a savings account. If you don’t have an emergency fund, you could be forced to rely on high-interest-rate credit cards, take out a loan or tap your retirement account when the unexpected strikes.
You never know when you might lose your job, have a health problem, need an expensive car repair or any other unexpected big expense.
Sponsored Content
4. Spend within your means, not your dreams.
If your kid can resist the fancy cars and McMansions, they’ll be able to fulfill these dreams down the road. Delayed gratification is very important!
Sponsored Content
5. Recognize life has relentless bouts of healthy friction.
Do we take that vacation this year, or save more for retirement? Everyone needs a healthy balance between living their life today and planning for the future.
Sponsored Content
6. Protect your family adequately with life and disability insurance.
Term life policies for 20-somethings are incredibly inexpensive. Your kid should consider purchasing a 30-year term policy providing $250,000 to $1 million of death benefit, and if their employer offers disability insurance, they should take it. If the employer offers extra, they should purchase it.
No one is bulletproof, and a term life policy purchased now, when your Millennial is young and healthy, can help support their family’s finances in the event of the unthinkable — especially if they’re considering starting their own family in the next few years.
Sponsored Content
7. Invest heavily in stocks when you’re young.
When the market is down, it is on sale. They must be patient and remind themselves that every contribution they make is purchasing shares on sale. If you go to your favorite store and everything is 50% off, do you buy? Of course! It’s your favorite store! Your kids should look upon investing the same way.
That said, knowing which stocks to buy in this scenario can take a level of time and sophistication most of us simply don’t have. Your Millennial should take advantage of the target retirement date mutual funds offered by many employer-sponsored retirement plans, which take the guesswork out of what to buy and when.
Sponsored Content
8. Nurture your career.
The best way to save for the future is to get promotions and raises. When your kid gets a raise or promotion, they should devote some of the increase to a long-term plan.
For instance, if they get a 15% raise via a promotion, they should apply 5% of that raise to an increase in long-term savings — and enjoy the other 10%.
Sponsored Content
9. When you have a cash flow improvement, approach it with thoughtfulness.
As an example, let’s assume a car loan is paid off, freeing up $250/month of cash flow. Most people do nothing, and it is like a glass of red wine in the financial bloodstream. Your child should think through how some or all of that improved cash flow can be strategically deployed for long-term savings, additional debt reduction or both.
Sponsored Content
10. Establish a goal for a savings rate and a long-term nest egg.
I suggest young people endeavor to save 15% of their income for long-term retirement. That is the here and now. The long-term goal is for them to save eight to 12 times their pre-retirement income for retirement. Therefore, if at 60 they’re making $50,000 annually, by then, they should have a $400,000-$600,000 nest egg.
Developing healthy savings habits is not the easiest of tasks, but with guidance and support from loved ones, your kids can set themselves up for success. It’s worth taking the time to sit down with them now, just as they’re getting on their feet, to set them on the right path.
Sponsored Content
-
Here's How To Get Organized And Work For YourselfWhether you’re looking for a side gig or planning to start your own business, it has never been easier to strike out on your own. Here is our guide to navigating working for yourself.
-
How to Manage Risk With Diversification"Don't put all your eggs in one basket" means different things to different investors. Here's how to manage your risk with portfolio diversification.
-
The Best Places to Retire in New Englandplaces to live Thinking about a move to New England for retirement? Here are the best places to land for quality of life, affordability and other criteria.
-
What Does Medicare Not Cover? Seven Things You Should KnowHealthy Living on a Budget Medicare Part A and Part B leave gaps in your healthcare coverage. But Medicare Advantage has problems, too.
-
13 Smart Estate Planning Movesretirement Follow this estate planning checklist for you (and your heirs) to hold on to more of your hard-earned money.
-
The 10 Cheapest Countries to VisitWe find the 10 cheapest countries to visit around the world. Forget inflation woes, and set your sights on your next vacation.
-
15 Ways to Prepare Your Home for Winterhome There are many ways to prepare your home for winter, which will help keep you safe and warm and save on housing and utility costs.
-
Six Steps to Get Lower Car Insurance Ratesinsurance Shopping around for auto insurance may not be your idea of fun, but comparing prices for a new policy every few years — or even more often — can pay off big.
-
How to Increase Credit Scores — FastHow to increase credit scores quickly, starting with paying down your credit card debt.
-
Hurricane Insurance Claims: 10 Things You Should KnowBecoming a Homeowner Hurricane damage? Know what’s covered, what isn’t and how to make the most of your policy if you need to file a claim.
