My kids are leaving the nest and starting their careers, what should I tell them about saving and investing?
Answer: As young adults enter into their careers, talk to them about starting to save early for retirement and the importance of preparing for financial emergencies.
Here are a few discussion points you can use.
A great place to save and invest money you earn is in a Roth IRA.
- If your children have jobs, encourage them to open Roth individual retirement accounts.
- Explain that interest in a Roth IRA grows tax-free for life.
- Experiment with different amounts of savings and interest rates. Use a compound interest calculator at investor.gov.
- Use the "Rule of 72" to estimate how many years it would take to double your money. If you invest in an account that earns 8 percent interest, you'll double your money in nine years (72 divided by 8 is 9).
- Explain to your child that once he starts a job, he may be offered a similar account at work called a 401(k). In a 401k, he can deposit pre-tax dollars through a payroll deduction. Some employers even provide matching contributions. The money in the account generally won’t be taxed until it’s withdrawn.
When investing, consider the risks and the annual expenses.
- Invest in an IRA or a 401(k) as soon as you have some income.
- Putting all your eggs in one basket can be a risky way to invest; consider a diverse mix of stocks, bonds, and cash.
- Compare mutual fund costs: An "annual expense ratio" of 1.5 percent instead of 0.5 percent on a $1,000 investment could cost you almost $2,000 over the course of 35 years.
• Ask about index funds, which tend to have low annual fees.
- Think about your goals. Attending college? Buying a home in 10 years? Purchasing a car in five? Define two financial goals for the long-term future, and make a plan to achieve them.
It's important to save for emergencies.
- Financial emergencies will happen, it’s only a matter of when. Be prepared by starting a savings account to handle repairs, replacements, sudden trips, job loss, etc.
- Some experts suggest saving three to six months’ worth of expenses. If this seems too difficult, start by looking back at some recent financial emergencies. Set a savings goal you think will meet your urgent needs. When you reach that goal, aim higher.
- Keep your money in a safe place, like a federally insured bank or credit union.
For more money activities for your child, visit our Money As You Grow section.