Starting Strong: 4 Financial Priorities for Recent Graduates
Your Clients’ Kids Are Graduating. Here’s How You Can Help
Just over 4 million kids graduate college in the U.S. each year. We celebrate this great accomplishment every year, but after the confetti settles, many of these graduates face a new set of challenges. Finding a good job, managing student debt, finding a place to live, the list goes on.
For financial advisors, you’ve helped your clients prepare and save for their kids’ education. When rubber meets the road, the diploma is only a steppingstone; now the true goal of success and independence begins. For the attentive advisor, there is a strong opportunity to show your clients you care while building the future of your business.
Why You Should Help Your Clients Launch Their Kids
We mentioned a few of the large financial decisions recent grads need to make – careers, debt, housing, and the ever-present lifestyle question. What’s challenging is that despite the big money decisions the younger generations have to make, financial literacy is not their sweet spot. This is evidenced by a financial literacy study conducted at the George Washington University School of Business where they scored the lowest.
Ironically, the younger generations are less interested in hiring financial advisors to hold their hands. Instead, 84% of Gen Z trust their family members to help them navigate the financial maze.
If you’re an advisor looking to grow your business it’s important to find good in-roads for younger audiences. One of the best ways to do that is by engaging your current clients as parents and helping them guide their kids financially. This endears you to your clients as it shows that you care about their families, not just their accounts.
To help you engage your clients with recent grads, here are 4 helpful focuses to emphasize.
1. Make the 50-30-20 Rule Your Friend
As they enter the workforce, grads are going to start earning full time money soon if they haven’t already started. How they spend it is going to be a major determiner of whether they’ll be financially secure now or down the road. The 50-30-20 is a good starting point that will help them decide what to save and spend.
Before everything else, it starts by writing down your income and expenditures. Categorize your expenditures into three; needs, wants and savings.
According to this budgeting method, you spend 50% of your income on needs. Your needs include necessities for your survival such as food, mortgage payments or rent, Medicare, loan payments, clothing, and utilities, among others.
Set aside 30% for wants, which include nonessentials like supplies for hobbies, shopping, subscriptions and travel costs.
Finally, the 20% should go towards savings. Depending on your plans, you can save to pay down debt, for a mortgage downpayment, or for other investments. Putting money in an emergency fund should also fall under this category.
2. Start Building Your Credit Now
With investing and building credit, the earlier, the better. While it may not seem like an issue the first time you graduate, good credit will come in handy when applying for a mortgage, getting a new credit card or applying for a loan.
If your clients’ kids are having a hard time getting approved for their own credit card, there are other options that can help them get started building their credit.
The more independent option is a secured credit card. When you go the secured credit card route, they’ll have to pay a deposit which will act as the credit card’s limit. They can make daily purchases with the credit card to grow their credit report and qualify for an unsecured credit card.
If they need a little bit more support, one option is for your clients to set up a child as an authorized use. For authorized users, the primary cardholder will set a credit limit but you’ll not be liable to pay off debts on the credit. Remember the card issuer must report the authorized user to the credit bureaus to have your credit report updated.
3. Pay Off Your Debt Quickly
Now, to the elephant in the room. As of Q1 of 2023, student loans stood at a whopping $1.60 trillion, meaning most new graduates have a lot of debt to pay off. These debts can derail a new grad’s financial journey, so creating a plan to start eliminating debt early is crucial to not accumulating interest.
Graduates may have two student loans to pay namely private student loans and federal student loans. Typically, private student loans are more expensive than federal loans. What’s more, federal student loans have a six to nine-month period during which they’ll be required to update their information with the loan servicer.
There are many methods to pay debt successfully. They can either choose the avalanche method or the snowball repayment method. With the avalanche strategy, you’ll pay off high-interest debts first to reduce your interest. On the other hand, the snowball method requires you to start repaying the smaller loans to build motivation and finish with the bigger loans.
If they have high-interest loans, they might also consider refinancing them to help reduce the interest rate and get better payment terms.
4. Make Savings a Part of the Budget
It’s never too early to start saving for a first car, mortgage down payment or even retirement. While it may seem hard to start saving right after graduation given the many bills they may have to deal with, it’s usually one of the best financial decisions they can make.
Starting to save early inculcates a saving culture, which makes saving easier even when you have a small income. Besides, they may be able to leverage an employer’s retirement match program, which means they’ll have much more money for retirement than when waiting to start saving late.
Encourage them to talk to their employer and learn how their 401(k) plan works. Some employers may match part of their contributions so be sure to take advantage of that. To stay disciplined, we usually recommend having contributions deducted directly from their paychecks.
Another way to stay motivated and stay true to the saving cause is to set saving goals. Set achievable goals both in the short term and long term and estimate how much money they might need and your timeline for accomplishing them. Achieving your short-term goals will give them a psychological boost to keep saving and reinforce the habit.
A Great Way to Demonstrate Your Care for Clients
So, you’ve helped your clients plan and optimize their finances and meet their investment needs. You’ve worked hard to help plan for their goals, dreams, and priorities. It’s a powerful showcase of your care for them when you show your clients that you do not only care about their accounts but also their families.
With many graduates coming into the corporate world with poor financial literacy, it’s time to engage your clients and help them guide their kids financially. While parents understand their kids need financial literacy, they are not sure how to do it. So why not chip in and be the game changer?