Saving for Retirement

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Your Investing Life: Helping your adult kids get started as investors

May 15, 2014

As a parent, what can you do to help get your kids on the path to financial success? Plenty, say our experts!

For many young adults, planning for their financial future, especially retirement, just isn't on their radar, which can create stress and worry for you. But time is a powerful ally. The earlier your kids start saving, the more likely they'll be ready to meet future financial challenges.

Getting them motivated

Charles RileyInspiring your kids to get into the saving habit can be tough. Good financial habits are often learned at an early age. Parents can do a lot to instill and encourage these habits, according to Chuck Riley, a financial planner with Vanguard Personal Advisor Services.

"One of the best things parents can do is set a good example when managing their own money. Kids watch what you do and learn both good and bad financial habits. Parents shouldn't underestimate their influence on their children," he said.

Here are some tips to pass on to your kids (and to remember for yourself).

Track your expenses. Have your kids write down exactly how much income they have coming in and the amount of expenses going out. Tracking how they're spending money can often be a real eye-opener. That $5 latte each morning can suddenly look a lot different on the balance sheet at the end of the month.

Colleen JaconettiSet a budget. Once they've gotten a handle on their income and expenses, Colleen Jaconetti, a retirement and investment expert in the Vanguard Investment Strategy Group, says you should help your kids create a reasonable monthly budget.

"As part of the budget, don't forget to have them pay themselves first. Include the amount of money they intend to save as part of their monthly budget so they consistently save," she said.

Keep credit in check. Good credit is something everyone needs to have. It's important to establish and build your credit rating. A good credit rating will allow your kids to get a better interest rate when borrowing money for large purchases like a house or a car.

Most importantly, teach your kids to make credit work for them—not the other way around. A good rule of thumb is to not buy anything on credit that they can't afford to pay for with cash. Also, they should try to pay off credit bills every month so they're not incurring unnecessary interest.

Help them lose the debt

One of the most important steps your kids can take to gain control of their finances is to attack their debt. Debt is the enemy of financial success. Encourage them to focus on paying down debt and keeping expenses in check so that they don't get further in the hole.

When your kids pay off debt, such as a car payment, tell them to continue to set aside that money as if they're still paying the bill. When it comes time to buy a new car, they may not have to borrow as much.

Explain time is on their side

Encourage your young adult to get started saving by setting aside at least a small amount of their paycheck for their retirement.

Offering real-life examples of what saving can mean may provide the jump start they need. Ms. Jaconetti suggests showing them what saving as little as $50 a paycheck could mean with modest investment earnings over a period of 30 to 40 years.

Have them meet their match

Young investors who are working often have 401(k) retirement savings plans as part of their job benefits. Mr. Riley suggests encouraging your kids to take advantage of any employer-matching contributions.

"Don't give away free money by not contributing at least up to the employee match," he said. "That's a 100% return on your investment!"

Once they've met their match, encourage your kids to gradually increase their savings rate. Vanguard recommends a savings goal of at least 12%–15% of income, including any employer-matching contributions.

Be ready when the rain comes

When it comes to emergency funds, it's a good idea to have at least 3–6 months of expenses set aside for unexpected costs. Doing so will give your kids a cushion—and time to deal with an emergency without the added stress of falling behind financially.

Parents who are financially able can provide a place for their kids to live. More and more parents are taking this route. According to a recent Harris Interactive survey, 26% of baby boomers say they're supporting their adult children by allowing them to live with them.

Without the burden of living expenses, your kids can use more of their earnings to pay down debt, save for a down payment on a house, or put away money for retirement.

Allow them to fail

Finally, parents can help their children by simply allowing them to fail. After you've given them advice, let them make their own mistakes can be the most effective lesson.

"It can be hard for parents, but sometimes your kids have to learn for themselves. Parents can take a hands-off approach and allow them to make mistakes and that's OK," Ms. Jaconetti said.

"Growing up, whenever I got money given to me for Christmas or a birthday, my parents would make me take half of it and put it in the bank. I didn't appreciate it at the time, but that really helped me establish good saving habits," Mr. Riley said.

For more financial steps your young adult can put into practice, check out Your Investing Life: Gaining financial independence.

Note:

  • All investing is subject to risk, including the possible loss of the money you invest.
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