If you are saving for your child’s college education, you may need to save a little more for financial support after graduation.
According to a new study by American Express, 80% of graduates move in with their parents after graduation due to financial instability, and almost half of recent graduates are receiving financial assistance from their parents.
The average student loan debt is $24,000. Graduates may also have another $3,000 in credit card debt. These young adults are financially stressed before they enter the work force, and many have to turn to their parents for help. But these parents have just spent a lot of their money to pay for the college education and need to be saving for their own retirement. The parents may need their own financial help.”
Tips for a Good Financial Start for Graduates
1. Budget everything and put every dollar in place. Start with your net income–your income once taxes, healthcare, and retirement are taken out. Don’t underestimate expenses. Track your spending for a month to get an accurate understanding of how much your bills and expenses really are and where your money goes.
2. Start saving immediately from every paycheck, even if it is only a small amount. Open a retirement account at work or your own IRA. Time and compounding interest will help your small amount grow into significant savings by retirement.
3. Open a separate savings account to save for an emergency fund. The goal should be three months of income. If you lose your job or have sudden, unexpected expenses, your emergency fund–not your credit card–should be your safety net. Using loans to pay for an emergency simply adds to the cost of the emergency.
4. Pay off your credit card debt as soon as possible. If you are carrying a balance on your card, do not put any new purchases on your credit card. If you can’t pay for it with cash, you can’t afford it, so don’t buy it.
5. Set a payment schedule. If you are not trained in paying bills, it is easy to misplace a bill or pay it late. This can be punished by late fees and even lower credit scores. The easiest way for young people to pay bills is to do so online with scheduled reminders for payments.
6. Improve your credit score because it is the number that lenders, employers, and even renters will use to judge you. A good score (a FICO of 720) will get you the lowest rates and save money on auto, credit card and mortgage loans.
7. Monitor your credit history with free annual credits reports through annualcreditreport.com. You can get a free credit report from each of the three credit agencies (Equifax, TransUnion, and Experian) every year.
Tips for Parents
1. Prepare your student for financial independence. Put your college students on a budget. Give them a fixed amount of money every month that is just enough to cover their expenses so they learn to control their spending–a skill they must have when they are on their own. One day, they will have to survive in the world without the bank of unlimited funds from their parents.
2. Don’t sacrifice your retirement to pay for college. It may be tempting to tap your IRA for college, but there are costly consequences and it can leave you short for your retirement. Once the money is spent, it is difficult to rebuild a large balance. Early withdrawals from retirement accounts are expensive. You may have to pay income tax or a 10% early withdrawal penalty. Retirement account distributions also count as income.
3. Prepare a plan with your student to pay off college debt. Student loans may be necessary for many families to pay for college, but it is essential to have a plan to pay off this debt.
4. If your child must move home, establish rules. This should be a temporary move to help your child get financially established, not to avoid reality and responsibility. Charge a reasonable rent and an amount for utilities, groceries, etc.
5. Set deadlines and enforce them. Financial assistance is temporary help, not a trust.
6. If you are struggling to make your own ends meet, you may not be able to afford to give much help to your child. Do not go into debt or damage your own credit to give financial help.