College, Saving, Student Loans
May 30, 2019
Earning a college degree is a fantastic accomplishment. Congratulations to all the recent grads.
If you have a recent college grad in your life, I hope you will stay focused on continuing to help them. Especially right now. Moving from college to adulting is fun, exciting, and oftentimes a period when so many young adults make costly financial mistakes.
The sad truth is that it’s rare for any college grads to have been taught how to be money smart. That’s where you need to step in –once again –and help them learn the habits that will build financial security.
Here’s what to focus on:
Start student loan repayment. The single worst mistake a young adult can make is to fall behind on student loan payments. That will increase their borrowing costs, ruin their credit and can’t even be forgiven in bankruptcy.
Technically, student loan borrowers don’t need to begin repayment of federal loans until six months after graduation. Payments are required even if they do not have a full-time job just yet. The smart move right now is to have the borrower contact the loan servicer and find out when payments must start, and what the monthly payment will be for a 10-year repayment plan. Being able to start on time and pay back the loans within 10 years is the best move. Yes, they can ask to delay starting, but forbearance and deferment can come at an additional cost; in many cases interest owed continues to be added to the loan balance.
Resist cosigning for car loans. I know you want to help your recent grad get off on the right foot, but helping them with a car loan can lead to all sorts of bad decisions.
I don’t want you helping with car loan payments. Period. Your financial priority is saving for retirement, building your emergency reserve and if you have any credit card debt, getting it paid off ASAP.
And you need to be clear-eyed about cosigning for a car loan. Remember, it will impact your credit score as that is money you are will be legally responsible for. And if anyone asks you to cosign a loan for a new car and the loan is for more than three years, you are crazy to say yes. Just because someone may need a car to get to work, does not entitle them to a shiny new car that they want. Their focus should be on finding a less-expensive used car that is safe, that will be able to pay off within three years and then keep driving.
Charge rent. If a grad is moving back home for a bit, they are to contribute to the family’s expenses. That’s not you being mean. That’s you helping them build adulting muscles. This is important on principle. Even if you don’t need them to pitch in, you should want them to. It should be an automatic direct deposit into your checking account. If you want, you can then shuffle the money off to a separate savings account that you will give back to your grad when he or she is ready to move out.
Show them how to outsmart you. Whenever I ask parents and grandparents what their biggest money regret is, they typically tell me they wish they had started saving for retirement sooner. This is your chance to make sure your new college grad gets this right. If they have a job that automatically enrolled them in a retirement plan, that’s fantastic. Just encourage them to make sure they are contributing at least enough to earn the maximum company match.
If your new grad doesn’t have a workplace plan, the biggest financial favor you will ever do them is to encourage them to save in a Roth IRA. They can contribute $6,000 this year. That’s $500 a month, or $125 a week. Try to make that the goal, but saving anything is a great start.
Some motivation to share: A 23 year old who manages to save $6,000 a year and earn an annualized 6% will have more than $1.5 million at age 70. If she waits until age 35 to start saving she will have about $800,000. That’s the power of compound growth that the young can grab. Use my free compound growth calculator to see how time is a young investor’s secret weapon.
Credit & Debt, Saving, Investing, Retirement