Launching Your Gen Z Graduate Into the Big, Wide Financial World
It’s that time of year when graduation announcements start arriving and parents start sending their graduates into the world with words of wisdom, well wishes, and copies of Oh, the Places You’ll Go.
One of the most meaningful gifts a parent or guardian can give a young graduate is wise counsel on financial matters. We’ve developed some guidelines to help you show Generation Z the way. Our Young Adult Checklist includes actions for you and financial direction to give to your recent graduate.
Financial actions for parents
Review 529 plans or other savings earmarked for college expenses
If you haven’t already, discuss any accounts earmarked for tuition and college expenses and develop a budget for your child’s educational timeline. Remember that 529 plans only allow tax-free distributions for qualified higher education expenses, such as tuition, books, computers, software, and supplies, while general savings can be used for nonqualified expenses such as sports and activity fees or transportation.
In addition, many students rely on loans for at least a portion of their college expenses. We encourage serious discussion and education around the obligations connected to this debt.
Check up on “gifting” accounts
If you or a family member have gifted funds to a minor via the Uniform Gift to Minors Act or Uniform Transfer to Minors Act (UGMA/UTMA), you should be aware that these accounts will typically transfer title or distribute outright to the child at age 18 or 21 (the age varies by state). In order for a parent or legal guardian to have access to account information and continue assisting in the management of the funds, authorization must be given to the financial institution by the account holder.
This is also an opportune time for parents or guardians to provide the account holder with some guidance on what the gifts to this account represent and expectations for use of the funds (for college expenses, for example, and not a new car). Also consider adding transfer on death/payable on death (TOD/POD) titling on the account and any others in the grad’s name where a specific beneficiary can be named.
Review your individual income tax filing options
While your child living at home or at college may remain a dependent for income tax purposes (so long as you provide more than 50 percent of the individual’s support), the family should consult with a tax advisor on filing options. If a child has earned income exceeding a certain amount, he or she will need to file an individual tax return to report that income as well.
Review insurance coverage
- Automobile insurance — While you should always check with your insurance professional, it is typically more economical for someone in college to stay under your policy due to multiple vehicle discounts and because adults have a longer (and hopefully better) driving history. But the decision shouldn’t be made on premium cost alone — it may be better for the young driver to have his or her own policy in order to limit the parents’ liability. Have your insurance professional evaluate whether it makes sense to consider an umbrella policy if you don’t already have one. And if you opt to keep the young person on your policy, reinforce the idea of budget discipline by having him or her pay a share of the premium.
- Renter’s insurance — Renters should consider purchasing renter’s insurance, even if there isn’t very much or very valuable personal property that would need to be replaced if it is damaged or stolen. The key is to limit the renter’s liability in the event someone else is injured in the apartment or someone’s personal property is damaged and that person sues. Coverage is typically inexpensive. Children living in dorms or at home are often covered under their parents’ umbrella or homeowner’s insurance.
- Health insurance — Although students can continue to be covered under a parent or guardian’s health insurance plan until age 26, it is still a good idea to evaluate whether it is possible to obtain basic health insurance at a lower cost. This is particularly important for parents not included in a group policy where their premiums are not discounted as much as a young person’s premiums might be.
- Life insurance — Life insurance is not typically important until there is an insurable need, but it should be evaluated at major life events such as purchasing a home, getting married, or having children. Keep in mind that life insurance, in general, gets more expensive with age. Parents should consider getting coverage for debt obligations that they have taken on by co-signing for loans. If the child dies, the co-signer must pay the remaining loan balance.
Execute these basic legal documents
When a child turns the magic age of 18, he or she is no longer a minor, and, therefore, parents or legal guardians no longer automatically have access to or control over the child’s financial, medical, and education information. It’s important to have three legal documents drafted and executed by an attorney so you or someone your child trusts can take care of his or her affairs should the need arise.
- Living will — Sometimes referred to as a health care directive, this document describes preferences regarding treatment if a person is in a serious accident or faces a serious illness. It spells out the types of medical treatments to be used or not used — mechanical breathing, tube feeding, resuscitation, and other measures ― to sustain life.
- Medical or health care power of attorney — This document designates an individual to act on behalf of another person to make medical decisions in the event that he or she is unable to do so. As a health care agent, this individual is only authorized to make medical decisions, not financial. A health care power of attorney can be a supplement in situations that a living will does not cover.
- Durable financial power of attorney — Here you name an individual to act on someone’s behalf to make financial decisions in the event that person is unable to do so.
Financial advice for graduates
Establish a budget and stick to it
The most important financial advice you can give your younger self is to create a budget and stick to it. Regardless of occupation, those who master this discipline early in life set themselves up to be financially successful. The bottom line is to spend less than you make and invest the difference.
Take student loans seriously
Students need to know from the start that education loans are not free money. Loan funds should only be used for college expenses (as tempting as it might be to pay for a spring break trip), and they must eventually be paid back.
Protect your identity
Thieves continue to be more and more creative in their methods of stealing people’s personal information, especially (but not exclusively) online. Keep your Social Security number, date of birth, bank accounts, credit card numbers, and all passwords highly confidential. Make sure all online purchases and transactions are through secure websites.
Start saving and funding retirement early
Equally important to budgeting is establishing the discipline of saving, no matter how small the amount. Beginning a savings plan at a young age (in the early 20s, for example) will give money the potential to grow substantially with the power of compound interest over a long time horizon.
There is a concept called “paying yourself first,” which means that before you pay any other bills, set aside an amount considered payable to “self.” Having funds transferred directly from a paycheck helps keep the saver disciplined and consistent. We’ve never met anyone who thought he or she started saving too early, but we have encountered many who regretted starting a disciplined savings plan too late.
- Sign up for direct deposit — For both the emergency fund and large purchase fund, it is a good practice to have funds deposited directly to these accounts each pay period rather than relying on the discipline to move the funds between accounts after they are deposited.
- Save for large purchases — Saving for large purchases, such as a car or a home, is a good practice to start. It makes good financial sense to purchase a car with cash because it is a depreciating asset that starts losing value right away. Most financial institutions require at least a 20 percent down payment when obtaining a mortgage to purchase a home.
- Employer matching contributions — If you work for a company that matches retirement contributions up to a certain percentage, we highly recommend a contribution of at least that percentage. Most plans have calculators to help project the impact of savings contributions over a number of years.
- Roth IRA — The Roth IRA is a popular and attractive option that lets an individual save money now and use it for retirement with no taxes due on the income when it is withdrawn. There are income limitations that prevent high earners from contributing to a Roth IRA, and penalties for early withdrawal.
- Emergency savings fund — The goal of this fund will be different for everyone, but many experts recommend that, over time, this should be enough money to cover living expenses for six months.
Establish and build credit responsibly
Under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (known as the Credit CARD Act), anyone under the age of 21 is prohibited from obtaining a credit card without a co-signer or providing proof of income. One way to get a credit card is for parent and child to open a joint account with a low credit limit. The co-owned card will be reported to the credit bureaus, which will help the young owner start building a credit history. It’s also possible for parents to make someone under 21 an authorized user on an existing credit card, but that option does not build a credit history.
The key to establishing good credit is to use the credit card responsibly. This means:
- Make monthly payments by the due date (to avoid any late fees and avoid any negative reporting to credit agencies)
- Stay within your credit limit (to avoid over-limit fees)
- Pay the full balance each month by the due date (to avoid any interest charges)
CreditKarma.com is an excellent resource for you to monitor your credit and get education on what effects various credit choices might make on your credit score.
How we can help
As a parent, you face challenges at every phase of life, but one of the greatest is helping your children get started on a strong financial footing. Whether it is from high school or college, graduation is one of the times when you will begin to see if your plans pass the test. This checklist may have raised as many questions as it did provide answers. A CLA wealth advisor and tax professional and an attorney can help you plan for what’s next in life for you and your children.