The college graduation season is now in the rear-view mirror and scores of young people are starting to wrap up the summer break to head out on their own for the first time. This makes it the perfect time to engage clients who have newly graduated children about the importance of financial discipline and paying off debt. Many will appreciate a trusted advisor initiating a conversation that the younger generation needs to hear, but one in which they might tune out were it to come from a parent.
On the surface, discussing basic financial topics with someone who’s 22 or 23 may not seem like a worthwhile endeavor for an advisor, but it can make a world of difference to a client. Every parent wants to see their children make wise choices—and avoid mistakes the parent made at their age. And many people who start earning money for the first time develop bad habits with bill payment and credit cards unless shown the proper path.
Sharing best practices with a client’s adult child is also a prudent relationship management best practice. The advisor can strengthen client retention efforts with the parent, lay groundwork for a new client relationship with the child and increase the chance of getting referrals from both. That should be sufficient motivation for advisors to deliver these three tips to recent college grads:
1. Establish an emergency fund to cover three to six month’s expenses. A recent report from the Federal Reserve showed that 40 percent of adults could not cover a $400 emergency expense. Young people who start receiving paychecks for the first time find it particularly difficult to build savings. They often have gone from a parental allowance to a much larger paycheck, and want to have fun with friends. Unchecked spending on restaurants and bars, video games and electronic gadgets may not leave enough money for savings.
Advisors can explain the need for an emergency fund by telling the client’s child that putting aside enough money to cover three to six month’s expenses could prevent that child from relying on their parents again for money, on the off chance the child becomes unemployed. Few recent college graduates who have started taking care of themselves want to go back to a parental allowance or move back into their parents’ home.
2. Pay off credit card debt and student loans as soon as possible. Once young workers establish their emergency fund, they can focus on paying off debt. Advisors might think it’s obvious, but young workers need to hear that revolving credit card debt is dangerous. Far too many recent college grads who paid for small purchases with credit cards during school fall into the trap of paying for large purchases with credit cards, and then only paying the monthly minimum fee as interest accumulates.
Some of them even pay student loan bills with credit cards. Credit card interest rates typically exceed student loan rates, so your client’s child can end up paying much more over a longer time period. Although no debt is ideal for a young person, student loan debt is better than credit card debt. Unpaid revolving credit debt can ruin their credit scores, which can hinder their ability to one day get a mortgage to purchase a home.
Tell the client’s child to avoid late fees at all costs. In fact, the first time they get a late fee, they should contact the credit card company and try to get the penalty removed. Once credit card debt has been eliminated, the young worker can begin paying more than the monthly minimums on student loan debt to work that down as well.
3. Create a spreadsheet of all accounts, bills and interest obligations. This suggestion may feel like homework to the client’s child, but it’s some of the best advice you could give. Getting young workers to build and maintain a financial responsibility spreadsheet, in Microsoft Excel for example, sets up a process for looking at how their money flows. Once they start seeing how their behavior affects their finances, they frequently want to implement a plan of attack.
The young worker’s spreadsheet should include monthly balances, bills and payments for all income and expenses: bank and brokerage accounts, insurance policies, credit cards and student loans along with their respective interest rates, recurring bills such as housing and utilities, as well as tallies for fluctuating categories such as food, travel and shopping. This allows the client’s child to see several month’s back and plan several months ahead, to spend less on luxuries and prioritize debt reduction on bills with the highest interest rates.