The Financial Four for High School Grads

As millions of high school graduates collect their degrees, it’s time to prepare them for the next phase of their lives. In addition to the common sense wisdom that parents, grandparents and friends will be imparting, please allow “Aunt Jill” to add a few financial tips.

1. Start Saving: Even if your Gen-Zers are more comfortable with peer to peer money transfers, like Venmo, they still need to establish a banking relationship. Open an account with a brick and mortar bank, your credit union or an online institution. Many parents prefer to remain at their own bank and to even link accounts to keep an eye on what’s going on and to transfer money to the account seamlessly. Use this opportunity to provide graduates with a lesson in compound interest; insidious fees, like minimum balance and overdraft protection; and electronic bill paying.

2. Review Pay-stubs: Remember the first time you saw FICA and wondered, “Who’s FICA?” Most graduates will be working this summer and beyond, so review all aspects of a pay-stub. Explain the difference between gross pay (before taxes are taken out) and net pay (the amount you take home) and discuss how employers withhold all sorts of taxes, including: federal, which helps fund the nation’s military; state and local, which pays for schools and road maintenance; and payroll or FICA, which includes Social Security and Medicare, programs that help sick and elderly Americans. If you have trouble going through the paycheck with your youngster, use this pay stub graphic from money expert Beth Kobliner, the author of Make Your Kid a Money Genius (Even If You're Not).

3. Discuss Credit Cards: This important part of your child’s life can set the tone for his or her financial success. While some parents may choose debit cards to protect against future problems, they do not help establish that all-important credit history, which will become the backbone of your child’s future ability to borrow money at preferred rates.

To begin, have them review their free credit report at annualcreditreport.com and stress that credit card bills must be paid back in full each month; otherwise, you could be charged high interest. To illustrate the point, show them how long it could take to repay a $1,000 credit card debt by making the minimum monthly payments. Just hop on to the Credit Card Repayment Calculator from the Federal Reserve Bank of Dallas.

Next, determine what kind of card you will choose. You can add your kid as an authorized user on your own account, which allows them to spend and build a credit history, with the help of your good credit. While an authorized user arrangement allows you to keep tabs on activity, if junior goes wild, the primary account holder (that’s YOU!) will be on the hook for the charges. Alternatively, you may choose a secured credit card, which requires a refundable cash deposit, which is usually equal to or less than the card’s credit limit. The big complaint about secured cards is the low credit limit ($300-$500), which can increase over time.

4. Start Saving: It’s never too early to develop a savings habit. Have your kids establish an automatic savings program so that at least 10 percent of earnings is directed into a savings account. You should also open a Roth IRA account to instill the concept of retirement savings. Explain that a Roth IRA allows the money earned to grow tax-free for life. Some parents add an incentive, by matching their kids’ contributions dollar for dollar. You can experiment with different amounts of savings and interest rates by using a compound interest calculator at investor.gov.

Have a money question? Email me here.