Millennial About Managing Money

No way around it: Your grown child needs to save in order to achieve financial freedom. The ability to delay gratification is more important than ever, and here’s what you need to tell him or her:

1. Set up an emergency savings cushion. When you broach the topic of emergency savings with your grown child, you might well be greeted with a rant about high rents and low-paying jobs, and how saving is virtually impossible for his generation. That’s your cue to explain why it’s time to start saving now, even a tiny bit, regularly.

An emergency cushion can mean the difference between an inconvenience and financial disaster — so your Millennial won’t get evicted

An emergency cushion can mean the difference between an inconvenience and financial disaster — so your Millennial won’t get evicted for not paying the rent, for example. As an adult, your son or daughter will have to create a safety net rather than count on one held up at the corners by you.

The rule of thumb has been to save a cushion of six months’ worth of living expenses — enough to tide your child over until he or she finds work. That said, I recommend saying to initially shoot for a three-month cushion so the goal doesn’t seem unattainable. (For an online worksheet to help your kid figure out how much to set aside for living expenses, go to BethKobliner.com.)

2. Paying off high-rate debt can be the smartest way to save. Granted, this is another idea that might seem laughable to a recent college grad with zero in the bank. But it’s an important concept for your kid to get now — and one that even many adults don’t understand.

Here’s the gist: Before long, your child will build up some savings —particularly if he or she is living at home — and should use it to get rid of expensive debt.

Let’s say your son owed $1,000 on an 18 percent credit card and had $1,000 in a savings account earning 1 percent. By the end of the year, he’d have paid out $180 in interest to the card company and earned just $10 in interest on the savings account. Even though he technically had money in the bank, he’d actually have had a net loss of $170. If he instead used that $1,000 to pay off the credit card, he wouldn’t have earned any interest, but he wouldn’t have paid any, either; it’d be a draw. And that’s much better than losing $170.

But, you might be thinking, shouldn’t my child have the emergency savings cushion mentioned above? The answer: It depends.

If your son is living with you, he should rid himself of high-rate debt first and then save up his first month’s rent and security deposit for his own place. That is one of the supreme financial benefits of moving back home. This approach requires his firm commitment not to charge any more on his credit card than he is able to pay off in full the following month. Even if he’s out on his own, I say devote at least half of his savings to whacking away at that high-rate debt, and deposit the other half into a savings account for true emergencies only.

Once he has one month’s worth of living expenses in his savings cushion, he can start putting even more toward getting rid of that credit card debt. Only when it’s gone does it make sense for him to turn back to building up his emergency cushion to the minimal three months’ worth of expenses.

3. Make saving automatic. Behavioral economists know that getting someone to save voluntarily is a bit like getting someone to cheerfully sign up for a root canal. As your trusty Magic 8 Ball would say, “Outlook not so good.” That’s why your kid needs to set up finances so he or she doesn’t have to think about saving every payday. It’s a neat mental trick: Because we never see the money in our checking account in the first place, we don’t experience the pain of “losing” the money had we transferred it to savings.