A Guide to Teaching Your Children How to Invest and Save at Any Age—Part 4 - Santander
A Guide to Teaching Your Children How to Invest and Save at Any Age—Part 4
Smart Financial Decisions for Young Adults (18 to 25)
As a parent of a young adult, you know that the job of imparting knowledge to your child is nowhere near an end. The relationship may be different than it was when your son or daughter attended elementary or middle school. Yet talking about money remains important to help prepare your family for future financial success.
Parents have the gift of hindsight and understand that the decisions young adults make now can have a long-lasting impact. Choices such as which degree to pursue, whether to take student loans, and which job to accept after college can provide meaningful influences on the future financial well-being of your child.
According to Pew Research Center, 7 in 10 Americans believe that it’s more difficult for young adults today to accomplish important financial goals, such as paying for college, buying a home, and saving for the future.[i] As a result, it’s more essential than ever to offer support and guidance to your child as they navigate this challenging phase of life. You should also try to pass on real-world skills to help your son or daughter get a head start in their own financial life. The four financial lessons below are a great place to start.
Do one’s own taxes
Teaching someone how taxes work might not inspire much excitement from you or your child. Yet making sure your young adult understands the rules where taxes are concerned is a critical part of their financial education—especially if your child is a small business owner, freelancer, or an independent contractor. According to the Interagency Working Group on Youth Programs, 70% of adults believe that learning how to complete and file a tax return should be a key part of financial literacy training for young people.[ii]
Important tax-related topics to cover with your child include:
- Social security payroll taxes
- Medicare taxes
- Estimated taxes
- Filing dates
- Record keeping procedures
- Tax forms
It may also be wise to discuss tax strategies as well. Your young adult should understand that there are ways to potentially reduce their tax liability sooner rather than later.
Follow a budget
Another key personal financial skill to teach your young adult is budgeting. When people fail to use a budget, the financial consequences can be severe. Non-budgeters may struggle with overspending, creating excessive debt, and failing to save. Even among consumers who earn more than $200,000 per year, 28% live paycheck to paycheck according to a recent survey by LendingClub.[iii]
It is also critical to teach your young adult that a budget has nothing to do with restriction. Rather, using a budget is a way to accomplish the financial goals that matter most to you. Your son or daughter might want to make sure they have enough to cover monthly expenses, save for a down payment on a vehicle, plan a dream vacation, or afford something else. In each of these scenarios, a budget could empower them to reach their objective.
When you help your child create a budget for the first time, consider focusing on the goals that are most meaningful to them. Once they understand the benefits of budgeting (e.g., having enough money for needs and wants, avoiding debt, saving for goals), it should be easier to stick with their financial plan. As far as budgeting methods are concerned, it’s fine to try a few different options until you find the right fit for your young adult.
Understand health insurance
Another essential financial topic that you’ll want to cover with your child is health insurance, including the costs of monthly premiums, deductibles, co-insurance, the Marketplace, and even a Health Savings Account (HSA). Adequate health insurance not only has the ability to help your son or daughter protect their physical well-being, it can protect their finances as well.
Thanks to the Affordable Care Act, you can keep your children on your family health insurance plans until they turn 26 years old.[iv]Doing so is typically more affordable than having your son or daughter get their own separate coverage—even coverage available through an employer. (According to the Kaiser Family Foundation, the average worker contributed $6,106 in 2022—nearly $510 per month—toward their healthcare coverage.)[v]
Many parents opt to keep young adult children on their health insurance plan and to cover the cost of coverage to help make the financial transition into adulthood easier. However, there’s another option to consider as well. You could have your young adult child reimburse you for some or all of their share of the family health insurance premium, depending on your financial situation and parenting views.
Save for retirement
Your 18-to-25 year old may not have taken the time to think about their vision of a prosperous retirement. However, as an older adult with more life experience, you understand concepts that your young adult may not grasp yet, such as the power of compounding interest. As a result, you know that it’s never too early to begin saving money—and that includes putting away funds for the future.
Saving for retirement sooner can give your child a valuable head start. You may want to encourage your son or daughter to take advantage of employer-sponsored retirement savings plans (especially if a company match is available). Your child might also benefit from other tax-advantaged savings options as well. Even if your son or daughter can only contribute a small amount into an individual retirement account (IRA) at the moment, those funds and the interest they earn have the potential to add up over time.
You can use the free compound interest calculator from the U.S. Securities and Exchange Commission’s website to illustrate how powerful early investments can be. And helping your child develop a habit of investing in their future can be even more valuable in the long run.
Your young adult’s immediate financial goals will likely look much different than yours. Even if you feel like you have a good handle on your own financial strategy, you might not know the best way to set up the right financial plan for your whole family.
As a Santander Private Client, you can reach out to a Santander Investment Services Financial Advisor for help. Learn more about how to reach your vision of financial freedom and generational wealth for your family.
[i] "Most in the U.S. say young adults today face more challenges than their parents' generation in some key areas" Pew Research Center https://www.pewresearch.org/fact-tank/2022/02/28/most-in-the-u-s-say-young-adults-today-face-more-challenges-than-their-parents-generation-in-some-key-areas/
[ii]"Facts About Youth Financial Knowledge & Capability" Youth.gov https://youth.gov/youth-topics/financial-capability-literacy/facts
[iii]"New Reality Check: The Paycheck-to-Paycheck Report: The Inflation Edition" Pymnts.com https://www.pymnts.com/study/reality-check-paycheck-to-paycheck-inflation-consumer-spend-expenses/
[iv]"Young Adults and the Affordable Care Act: Protecting Young Adults and Elimination Burdens on Businesses and Families FAQs" U.S. Department of Labor https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/young-adult-and-aca
[v]2022 Employer Health Benefits Survey” KFF.org https://www.kff.org/health-costs/report/2022-employer-health-benefits-survey/
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