Equipping New Grads for Financial Success

Earlier this summer, millions of college graduates exited the stage with diplomas in hand ready to embark on careers; and for some, financial independence. However financial literacy is a subject that receives too little attention, especially from young adults. How do parents equip new grads for financial success? Simply put, they must capitalize on every opportunity to provide valuable knowledge and perspective during this transitional period of the young grad’s life.

“There's something different about this generation.” This is what every older generation says about the next generation. Only this time, it's true.

Graduates entering the workforce this year represent the last of the Millennials (those born 1980-1995), a group some 80 million strong and a number that eclipses every other generation in America according to Pew Research Center. The group is well studied (and publicized) for its tendency toward social responsibility, commitment to values, and emphasis on flexibility, life experiences, and individualism. Less talked about are Millennials' unfavorable financial behaviors and attitudes toward investing. And herein lies the challenge many parents face with young adult children—and for Wall Street.

According to Deloitte, many Millennials have an innate distrust of financial institutions (and money managers). Some attribute this to what they saw their parents go through in 2008. What's more, they tend to be risk averse, with less than 30% of their wealth in the stock market.

Meanwhile, Americans are living longer, with an average of 20 healthy years after age 60, according to the MIT AgeLab. The looming threat to Social Security from prolonged lifespans and diminished reserves would suggest that new grads should exercise their time advantage and begin investing early. But how does one urge a 20-something to put aside income today, for an outcome as far off as retirement? After all, less than 1 in 5 of people age 18 to 25 invest in the stock market, according to a study conducted by Bankrate.

Lack of financial preparedness coupled with an increasingly strained safety net is one reason to encourage new grads to develop long-term wealth accumulation strategies — sooner than later. Knowledge about the power of time and compounding returns is necessary; yet these concepts are not well understood by this generation.

The nature of work for many today also presents unique challenges. According to one estimate, the socalled “gig” economy makes up 34% of the workforce and will increase to 43% by 2020. As the 1099 continues to outpace the W-2, future generations will likely need to be even more proactive about carving out their own financial stability, rather than depending on work sponsored 401ks or pension plans like previous generations.

How are parents responding to all this? Carrie Schwab-Pomerantz, President of Charles Schwab Foundation and personal finance expert, expresses her concern, "As a proud mother of three Millennials, I want to do my best to help them—and their peers—become fulfilled, independent, and productive adults. And I believe a big part of that is introducing them to prudent money management and investing."

Learning basic financial fundamentals can go a long way — especially for high-net-worth families whose children will one day manage significant inheritances.

So the question remains, how might this younger generation be encouraged to establish effective money skills and develop a stronger financial footing? Fortunately graduation offers a timely opportunity to communicate the importance of building healthy financial habits that can last a lifetime.

Start the Conversation

Its time to have “the talk.” No no, not that talk, I'm talking about the financial or “money” talk. For many families this is the point in time where parents define what expenses they will continue to “cover” and for how long. This clearly establishes expectations and transitioning responsibilities. For example, parents might choose to continue to cover health care while shifting to the new grad other costs, such as cell phone, clothing, etc. For many young adults this can be the first time they truly understand just how much their parents have been providing for them.

This “talk” is especially important for graduates who choose to move back home for a period of time. Even though they aren’t officially out on their own, this is the crucial time to establish bill paying disciplines. While it may be tempting for parents to continue covering all expenses while the child gets on his or her feet, this is generally believed to be counter productive in the long run. Some additional topics for “the talk” would include: 

  • Setting up auto pay for regular bills

  •  Enrolling in a new employer’s 401k plan as soon as they are eligable  Developing good record keeping disciplines

  •  Avoiding the misuse of credit while building a solid credit score (creditkarma.com)

  •  Establishing a budget, and sticking to it

  •  Understanding the difference between “needs” and “wants”

  •  Developing long range goals for big ticket purchases (autos, homes, etc)

  •  Helpful apps and online tools

Graduation Gifts That Create Future Investors A 2017 study showed that Americans planned to spend upwards of $5.6 billion on graduation gifts—more than half of it being straight cash (CNN Money.) Perhaps, though, what the next generation really needs is guidance on becoming self-reliant, financially responsible adults. Here are some great ideas our clients have pursued in lieu of, or in addition to, graduation gifts.

  1. 1. Match savings contributions. Opening a savings account can open the door to developing a savings habit. Parents can make the initial deposit and match a portion of their graduate's contributions. (Note: In 2018, up to $15,000 can be given per recipient without incurring gift tax issues, $30,000 if a couple is acting together). Parents who go this route will typically articulate stipulations or conditions about how, and on what, the savings can used, such as major purchases like a down payment on a house or for a new car.

  2. 2. Fund (or match contributions to) an IRA. Opening a tax-advantaged Individual Retirement Account (IRA) could be the right move if the graduate is freelancing or currently ineligible for a 401(k) through their employer. Roth IRAs, funded with after-tax dollars, offer tax free growth and tax-free withdrawals, and are a practical option for those with smaller incomes.

  3. 3. Give stocks or investments the children have a personal passion for. Gifting stocks or ETFs that specifically appeal to young graduates is an effective way to pique their interest in investing. This could include instruments related automotive, biotech, technology, or socially responsible investments.

Creating Financial Values and Effective Legacies Graduation presents a unique time for young adults to become a part of the financial planning conversation. Some clients elect to have their children join them in our meetings, where we can provide additional information and reinforce financial values that are particularly relevant to that family.

Alan Moore, co-founder of the XY Planning Network and a Millennial himself has observed: “Statistics suggest that something like 42% of next-generation investors prefer to work with an advisor near their own age.” Clearwater Capital has intentionally assembled a diverse team of advisors representing various age groups to welcome grads into the conversation.

Important life events, such as college graduation, provide great opportunities to deepen and establish relationships. College graduation is the time when most young adults begin “adulting” and will either establish a pattern of good choices, or bad habits.

Clearwater Capital stands ready to provide assistance to families on many levels. While a college graduation represents an important inflection point for the new grad, it often represents a critical time for parents to reflect on their own goals and priorities. We encourage all families in the midst of important life events to engage in productive and thoughtful conversations, and we are happy to be part of that process at the appropriate time and place.