If you have any university or college almost-graduates in your family, they are about to be launched as young professionals in their chosen field. However comprehensive their program, it likely included everything they need to succeed in their career, but little to nothing about how to succeed financially once they start to earn. They are nearly defenseless against thousands of marketers who are cleverly looking to prey on their paycheques. Although they don’t want your advice on dating, clothing, or music, they do need your help getting set up financially. Mom and Dad, I am talking to you.
Step 1. Start their financial library
Get them on the habit of reading a good personal finance book a month. Spend a hundred bucks to get things started. Best investment ever. The right books will shape their thinking and build good habits from the start. Here are some great ones:
- The Richest Man in Babylon – George Samuel Clason – timeless lessons about how to make money work for you, vs the other way around. Cool Babylonian vibe. Great for history majors!
- Rich Dad Poor Dad – Robert Kiyosaki – turns around the notion that the rich people are the ones with the BMWs. They’re the ones with the payments. Who knew? Dads with small hats are often the ones with the cattle.
- Wealthing Like Rabbits – Robert R. Brown – a whimsical and fun tour through everything about personal finance. Perfect all-in-one starter kit.
- Moolala – Bruce Sellery – Simple, unintimidating five-step plan to get your grad started on a great financial path. His podcast on iTunes is also worthwhile.
- Mr. Money Mustache Blog – Best blog on inspired living through frugality. Personal favourite post – “How to move heavy appliances on your bike”. Strangely addicting. Bad ass vibe. And free. Subscribe your kid.
- Carrick on Money Newsletter – sign up here (scroll down) – great survey of the freshest personal finance thinking on the web. Everything from frugal tips to mortgage rules and that great Canadian enigma: To TFSA or RSP?
- Young Money Podcast – Tracy Bissett – has guests with every angle on how to set up young people for financial success.
- Cashflow Cookbook – I know, I know – a bit shameless. But 60 easy financial “recipes” to save your grad a fortune on every kind of recurring expense. Wish I read it in my 20’s. Bonus: enough cooking puns to fill a roasting pan.
Step 2. Help them with the big decisions
After 4 years of enduring cold pizza, smelly roommates, grimy clothes and crowded buses, junior may want to rebound with some well-earned luxury. A new car, a one-bedroom apartment, a high-end gym membership. A Roomba on 5 easy payments. Kidding on the last one. At least my kids never longed for cleaning gear.
But these recurring expense decisions can have a big impact on their wealth over the coming years. A common mistake is to look at what can “fit” into their paycheck vs what will optimize their wealth (and financial freedom) over time. Shared accommodation can save $1,000 a month vs living solo. Living in your basement for the first year can save another $500 a month while they get started. (I told my kids that zoning laws don’t allow it, am hoping they never check the local statutes). A 3-year-old modest car can save $500 a month vs a new, more luxurious one. Skipping a car and walking or biking can save another $500. Learning to make a few easy meals can save them another $200 a month or more on dining out.
Together these tweaks can free up a thousand or two a month toward their TFSA and/or student loan pay down. Getting these habits in place can spare them from being chained to paychecks into eternity.
Step 3. Set them up a net worth spreadsheet
Lots of people talk budgeting. Not sure how many people actually track to one. Not my idea of fun. And good luck selling the idea to your kid! A better approach is to track net worth: what you own minus what you owe. Very simple. It may well be negative when they start, but that’s no problem. Have them update it each month as they carve out funds for debt payment and savings. It’s gratifying to see the numbers go from red to black over time, or to see more commas emerge in the bottom line. It’ll give them the freedom to start their own company, take a world travel sabbatical, buy a house, or retire early and help people halfway around the world. Seek meaning instead of seeking a living.
The act of tracking net worth makes everything look different. Buying a new car plunges their net worth the day they drive it off the lot. A used car likely increases both what they own and what they owe, but their net worth doesn’t change. Hmm. A mall splurge on clothes they don’t wear takes a toll on net worth. Quality stocks growing in their TFSA increase their net worth without them doing anything.
Tracking net worth provides new lessons all the time and gets them thinking different. Maybe some lessons for you here as well! You can download a simple free net worth tracker in the Utensils Section, and check out my blog post that will help you learn to use it.
Step 4. Get them all the accoutrements
No need to even go to a bank branch. Charge up your wireless mouse and have at it! Help them get set up with a chequing account, credit card, TFSA and a savings account. Get automated bill payments set up for rent, cell phones, and gym memberships. It’s critical to get some automated savings in place right from the start. Something like payroll deductions for RSP or stock purchase plans, or biweekly chequing account deductions that head straight to their TFSA. Start the savings habit early! As they find ways to save, encourage them to increase their contributions and watch their net worth grow.
Step 5. Do a student loan review
If junior racked up some loans in the pursuit of knowledge, help them assess the right payback schedule and options. Are there cheaper ways to borrow? How can they optimize their expenses to pay it back sooner?
Be sure that the student loan is included in their net worth tracker and that they avoid adding more debt while whittling it down to size.
Step 6. Help them understand their company benefits
If they have been successful in finding a job, it’s time to review all of their company benefits with them. Company savings plans (401K, RSP matching, stock purchase plans) offer a great way to start their savings and it can be worth some sacrifices to fully take advantage of these plans. Many young people leave this free money on the cubicle.
Company medical and dental benefits are also worth a read. Most new employees can get their teeth around the dental plan, but they may miss some of the other benefits later in the booklet like eyeglass plans, massages (what the heck?) travel insurance, and prescription medical. Read the benefits book with them. Kind of like you used to with Harry Potter. Less magical. More profitable.
Above all, help them get a great start on their life
After all they have an asset that we don’t have. Their youth. Make sure they get the most out of it.
Photo Credit: David Marcu