My kids are leaving the nest and starting their careers, what should I tell them about saving and investing?
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 The money in the account generally won’t be taxed until it’s withdrawn.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.|