10 Financial Lessons for Young Adults Before They Leave the Nest - 401k Maneuver

10 Financial Lessons for Young Adults Before They Leave the Nest

The day has come for your little one to leave the nest. But if you haven’t covered the most important financial lessons for young adults, they may end up flying back home.

A lack of financial literacy and poor money management skills have left many parents paying for their adult children long after they leave home. 

A survey by Empty Nesters found, “According to respondents, nearly 40 percent are still financially supporting their children in some way. Of those, parents still spend an average of $254 per month on their child or children. Some of the top expenses that respondents said they still pay for include cell phone (24 percent), rent (19 percent), groceries (18 percent) and student loans (15 percent).”¹ 

We shouldn’t be too surprised. 

Today’s generation does not receive financial lessons in school. 

A Nitro survey of 1000 millennials’ perceptions of the public school system found 84% of respondents feel high school did not prepare them to handle their personal finances.² 

We can’t pin all the blame on teachers. 

As parents, we are responsible for teaching our kids basic finances before they enter the real world. 

T. Rowe Price’s 11th Annual Parents, Kids & Money Survey found 47% of parents admitted to missing opportunities to talk to kids about money or provide financial lessons for young adults.³ 

As a result, many kids leave home or go to college without even knowing the basics about how to manage their money.

For example, the LendEDU College Students and Personal Finance Study revealed the following:

  • 43 percent of students surveyed could not name one major difference between a credit and a debit card.
  • 23 percent of students surveyed could not name one major difference between a checking account and a savings account.
  • 79 percent of students surveyed did not know the difference between a traditional bank and a credit union.
  • 68 percent of students surveyed did not know what a 401k or IRA is used for. 
  • 81 percent of students do not have an emergency fund.⁴ 

When financial lessons for young adults are not taught, it leads to costly financial mistakes

For example, a survey from Edvisors found, “64% of college students reported they had run out of money before the end of the semester at some point in their college career.”⁵ 

Don’t let your kid become one of these statistics. 

Use the following 10 financial lessons for young adults to help them avoid costly money management mistakes once they leave the nest.

#1 How to Use a Bank Account

financial lessons for young adults

If your kid is going off on his own, we can assume it means he has his own bank account. This isn’t exactly true.

According to a report by the National Association of Student Financial Aid Administrators (NASFAA), “While nearly all respondents (90 percent) said they had experience with a checking account, just 60 percent were personal accounts, while the rest were joint or custodial accounts.”⁶ 

Your child needs a personal account when she leaves the nest. More importantly, she needs to know how to use it. 

Cover the following with your children:

  • Explain that they can shop around for a bank with the best interest rates. 
  • Show them how to read bank statements.
  • Teach them how to write a check and balance a checkbook.
  • Discuss bank fees and how to avoid them.

#2 How to Use Credit Cards

financial lessons for young adults

Unfortunately, many young adults leave home knowing little about credit cards.

They either think they are to be avoided at all costs or they should pay for everything with plastic. 

You need to teach them to find a healthy balance between the two extremes. 

That begins with explaining how credit cards work, such as how interest accrues.

Explain when it is wise to use credit cards (i.e., when they can get points or cash back but can still pay off their balance at the end of the month).

Conclude with discussing how credit cards can result in massive debt payments if they aren’t careful.

#3 How to Save Money

financial lessons for young adults

According to the LendEDU survey, 29% of students save 0% of their income each month and the vast majority do not have any emergency savings.⁷ 

Young adults think they are invincible, which may explain why saving is not a priority.

However, the more teens master the art of saving while they are young, the better they will be at it as adults. 

Additionally, young adults need to see the importance of saving in different categories: emergency, fun/entertainment, and retirement.

While they are more apt to save fun money for a vacation, it is just as important (or more so) to save for an emergency and their future.

#4 How to Understand Payroll Deductions

financial lessons for young adults

It’s always a big shock the first time you get a paycheck and discover how much FICA deducted.

Prepare your kids for the sad truth of income tax deductions.

But don’t stop there.

When they begin their first real-world job, they will have the opportunity to choose deductions, such as health insurance and retirement plans. 

For those just starting, they need someone to cover one of the most critical financial lessons for young adults – why today’s paycheck deductions lead to more financial security in the future.

Explain that the longer they wait to contribute to their 401(k), the more they will have to contribute each month to have enough money to retire. 

#5 How to Rent or Own

financial lessons for young adults

Most young adults rent. A Rent Café study found, “Millennials pay a whopping $92,600 in total rent by the time they turn 30.”⁸ 

There are many reasons why young adults choose to rent. Renting is cheaper upfront but owning builds equity.

That’s why it is important to talk about the pros and cons of renting or owning before they purchase their first home.

#6 How to Invest in the Future

financial lessons for young adults

When you explain deductions, it gives you the perfect opportunity to teach your kid how to invest in her future.

Most young adults can’t even imagine retirement.

However, if they start investing in a 401(k) or IRA at their first job, they will be leaps and bounds ahead.

Explain that while this money will be deducted from their paychecks, it will grow exponentially over time. 

Point out that, if their employer offers a company match, they should take advantage of it because this is free money for their future.

Stress the importance of automatic deductions for their retirement savings so they don’t have the opportunity to spend it. 

Make sure they know that, even if their employer doesn’t offer a 401(k), they can still invest in their future with an IRA.

Do them one better and set them up with a Roth IRA when they are young, which has the following rules:

  1. Your kid or grandkid must be working and bring home earned income.  
  2. You can contribute the amount of their earned income, up to the $6,000 contribution limit. 
  3. No money should be withdrawn until the individual is 59 ½ years old.

[Related Read: 6 Financial Gift Ideas for Kids and Grandkids]

#7 How to Pay Bills

financial lessons for young adults

Paying bills is brand-new territory for your kids.

Set aside a few minutes to talk them through the process. Teach them how to write a check and how to set up automatic payments.

This is also the perfect time to explain that not paying bills on time results in penalties, such as fines and a lower credit score (and a lower credit score impacts their chances of securing a credit card, loan, or mortgage).

#8 How to Budget

financial lessons for young adults

Learning to budget in your 20s helps establish your financial future.

Before they leave the nest, young adults should learn how to budget to cover their living essentials.

When they leave home, it is the first time many young adults pay for utilities.

Take time to create a budget with your young adult that covers all their expenses and give them tips on sticking to their budget (such as checking their balance regularly or using budgeting apps).

#9 How to Calculate Debt Pay

financial lessons for young adults

70% of young adults leave college in debt.⁹ And the average student loan debt in 2020 is $32,731.¹⁰ 

Keep in mind that this is just student loan debt and does not include credit card debt.

If your child enters the real world with debt, he needs to have a clear understanding of how that affects his financial future.

As soon as he starts earning a paycheck, suggest he begin paying down his debt.

Drive home the point by having him use a debt payoff calculator. 

#10 Why You Must Pay Yourself First 

financial lessons for young adults

Teach your kids the importance of paying yourself first.

And make sure they know the difference between treating themselves and paying themselves first.

Help them see that putting aside money every month for savings or retirement before they spend any more is the wisest financial decision they can make. 

Want to maximize your 401(k) and keep more of your hard-earned money? Check out our no-cost guide 5 Mistakes You Want to Avoid with Your 401(k) .

financial lessons for young adults

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Sources: 

  1. https://www.55places.com/blog/survey-reveals-empty-nesters-still-supporting-children-financially
  2. https://www.nitrocollege.com/research/remake-the-school-system
  3. https://www.slideshare.net/TRowePrice/t-rowe-prices-11th-annual-parents-kids-money-survey
  4. https://lendedu.com/blog/college-students-and-personal-finance-study
  5. https://www.edvisors.com/press/survey-shows-two-thirds-run-out-of-money-03-2016/
  6. https://www.nasfaa.org/news-item/14855/Survey_Incoming_College_Students_Struggle_With_Basic_Financial_Literacy
  7. https://lendedu.com/blog/college-students-and-personal-finance-study
  8. https://www.rentcafe.com/blog/apartment-search-2/money/millennials-spend-93000-on-rent-by-the-time-they-hit-30/
  9. https://www.bestcolleges.com/financial-aid/debt-free-degree/
  10. https://www.forbes.com/sites/zackfriedman/2020/02/03/student-loan-debt-statistics/?sh=77bea315281f
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