A CFP’s Advice for Your Graduate

by Andrea Norris-McKnight

What’s most important financially for graduates just starting out? A CFP offers advice for your graduate as they embark on their new journey.

Graduation is such an exciting time both for students and parents. Graduating students may be anxious to get started with jobs, new apartments, and a life on their own. And no doubt parents are excited that their children are embarking on this new endeavor.

But what about offering up some solid financial advice for graduating students before they begin their new journey? For some good financial tips that parents can offer their graduating children, we reached out to Laura Scharr-Bykowsky, CFP®, MBA, of Ascend Financial Planning, LLC in Columbia, SC. Here are her thoughts:

Q: What is the most important thing a new grad can do for their finances right after graduation?

Ms. Scharr-Bykowsky: The most important thing is to establish financial goals. Do they want to focus on student loan and other debt repayment or building an emergency fund? Do they need to save for graduate school? Are they planning for a marriage or home purchase? Once they prioritize these goals, it will set the foundation for their budget. Probably the biggest expense for recent grads is going to be rent, so they should spend time researching affordable apartments and or finding compatible roommates.

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Q: Is there a budgeting technique that tends to work best for new grads?

Ms. Scharr-Bykowsky: Young adults today are very comfortable with technology, so I suggest they work with Mint.com or Mvelopes.com to monitor their progress. I recommend they start off by constructing a basic budget that shows monthly income (after tax and retirement contributions) and then add all the known fixed monthly and annual expenses like rent, insurance, utilities, etc.

The next and hardest step is to add the fun/discretionary expenses. They should set a target amount for these and then see how much they are able to save monthly after taxes, if that is possible. If they are not realizing those savings or are dipping into their reserves (or accumulating credit card debt), they need to drill down on what expense items are the culprit. They should tweak these expenses as they get a better handle on what is realistic. The key thing is that they need to look at their expenses at least monthly.

The new grads also need to be aware that they will incur some upfront expenses to get themselves established in their new apartment or location. These are one-time expenses though, so they should not sweat their depleting bank balances. Anytime we have a life transition, we are going to spend extra money. In order to prepare, they should set aside a target amount for these moving in/one-time expenses or ask their parents for assistance with these if their parents are able to help out. Many companies also provide relocation bonuses to assist with an employee’s transition.

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Q: What kind of things should go in a new grad’s budget? Are there some things they typically forget to include?

Ms. Scharr-Bykowsky: I think the big eye opener for them is car insurance. Their rates will be higher if they no longer reside at their parent’s home. The cost can be three times what they pay under their parent’s policy. They should also include renter’s insurance and try to be realistic regarding their fun expenditures, such as eating out, vacation, and entertainment. They will likely not be able to live the same lifestyle that they had when they were under their parents’ roof. That can be a tough adjustment.

Most importantly, they need to include savings in their budget, both in their retirement plan at work as well as after-tax savings. They are likely going to want to accumulate funds for a future home, wedding, or graduate school.

Also, the most important insurance for a young grad is disability. It is extremely important that they sign up and pay for group disability if it is offered for them at work. This really is a non-negotiable item as their human capital is their greatest asset.

Q: What are some additional tips parents can impart to new grads regarding their finances?

Ms. Scharr-Bykowsky: Save early and often. Pay yourself first. Don’t try to keep up with expensive friends and their spending. Don’t take on bad debt, such as excessive credit card debt or auto loans. Experiences are more important than acquiring things.

Every parent should also give their kid a copy of the The Millionaire Next Door by Thomas Stanley.

Q: What do parents often forget to tell new grads after graduation regarding their finances that they wished they’d explained earlier?

Ms. Scharr-Bykowsky: I think the most powerful thing parents can do is share stories about how they struggled financially as young adults and had to forgo certain things in order to grow their wealth. My son never saw how my husband and I lived in the early years. We rarely went out to dinner or spent money on luxuries. We had a tiny apartment with no kitchen table for almost a year. We saved up over time and never spent money we did not have. We were really quite frugal.

As parents, we can be quite indulgent with our children, but the greatest gift we can give them is teaching them respect for money. Our kids need to realize that money is a precious finite resource. If we treat it as such and are good stewards of it, it can give us peace and financial security.

About the Expert

Laura Scharr-Bykowsky, CFP®, MBA is the principle of Ascend Financial Planning, LLC.

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