6 things to discuss with your kid before they start making money
As a parent, you know that your child's road to adulthood will be paved with new passions, first jobs, long nights, growing freedom, and—perhaps less exciting—financial decisions that begin to shape their future.
Luckily, you can help prepare your child for these major milestones by being open about money. The more you discuss your experiences with money—from mistakes to all-star moments—the more likely they'll be to seek out help when it comes to their first financial decisions.
Here are six rules you can share with your young adult before they start making money.
1. Pay attention to your credit rating
A first car or apartment is an important milestone for young adults, but their ability to secure a lease or loan could be compromised by a poor credit rating. To give your child every advantage in building financial independence, talk to them about the importance of building and maintaining good credit. Discuss the key factors in a credit score, and the basics of good credit habits. Most important, let them know that if they have any debts—like credit cards bills, a car note or student loans—they need to pay those obligations on time to ensure a strong credit profile. Pro tip: If you have a good credit profile, adding your child to your credit card account will allow them to inherit your credit history and give them a leg up in building their credit.
2. Negotiate your salary
A CareerBuilder survey revealed that 56 percent of new hires don't negotiate their salary, even though more than half of all employers say they're willing to negotiate their initial offers to entry-level employees. What's more, 26 percent of employers admit that their first offer is at least $5,000 less than they're willing to pay. In states where it is legal to ask employees about their current and past salaries, future salary bumps are typically based on past salary requirements. For those who don't negotiate, a lot of money—now and in the future—is left on the table.
The three essentials of good job negotiation are researching, role-playing and relaying information. This means your child should research the pay range for different jobs, offered through research from the Bureau of Labor Statistics. You can also offer to help rehearse what they'll say to an employer to counter a pay offer. These "mock interviews" will help them clearly articulate the value they will bring to an organization. This is especially important if you have a daughter: men are four times more likely to negotiate than women, according to research cited by in Women Don't Ask, co-authored by Carnegie Mellon economics professor, Linda Babcock.
3. Evaluate your fringe benefits
From student loan repayment to flexible work-from-home options, many employers offer a broad range of fringe benefits—on top of core benefits like health insurance and retirement planning. Many young adults say that these benefits are more important than a salary hike; in fact, a study from Glassdoor shows that 90 percent of Millennials prefer added benefits over pay raises.
When your child is contemplating a job offer, they should carefully evaluate all available benefits, taking into account not only their financial value, but also their own personality and preferences. If your child prioritizes their freedom, paid time off and work from home policies may be more desirable than, say, a 3 percent salary hike.
4. Enroll in a retirement plan
If your child is younger than 30, saving for retirement may not be a top consideration. But with decades of work before them, they are well positioned to leverage the power of interest over time. The more money they save in their 20s, the more choices and financial security they'll have later on.
Tell your child that one critical part of "adulting" is enrolling in an employer-sponsored retirement plan as soon as they are eligible. That could include a 401(k), a 403(b), a 457 or a Thrift Savings Plan.
And enrolling is just the start: many employers offer matching savings for a worker's retirement contributions. A simple way to increase retirement savings early on is to contribute the maximum amount that an employer will match. Be sure to explain how, even on a lower salary, maximizing the contribution will allow your child to make the most of their retirement plan.
5. Beware of lifestyle creep
The more money we make, the more we tend to spend. This trend, known as lifestyle creep, can cause long term damage to financial growth. In fact, a Nielsen study revealed that 25 percent of Americans making more than $150,000 annually live from paycheck to paycheck. The same was true for 33 percent of people earning $50,000 to $100,000, and 50 percent of those making $49,999 a year or less.
Unchecked, lifestyle creep could slowly drain your child's financial progress. Encourage them to be mindful of their spending choices. Point out that, just because they are making more money, they don't automatically have to start spending more. Instead, recommend that your child use their increased income to kick start their savings. Autosave—when funds are automatically transferred from your checking to your savings account—is an easy way for your child to level up their saving game.
6. Factor taxes into your budget
Once your child gets a job, they'll no doubt figure out that Uncle Sam gets a cut of each and every paycheck. A job offer for a $50,000 starting salary works out to about $39,000 in take-home pay for an unmarried taxpayer, assuming a 22 percent tax rate.
Make sure your child takes taxes into account in considering their overall budget, and especially when weighing job opportunities in high-cost—and high-tax—cities. For instance, can they really afford to live in downtown Chicago or the heart of San Francisco on their first-year salary? Taxes can be particularly tricky for young adults working in nontraditional fields, or part-time or contract gigs. Encourage them to seek out information on state and federal tax requirements so that they can better prepare for tax payments and avoid having Uncle Sam knocking at the door at the end of year to settle up.
While these six rules cover a wide variety of issues, they are only the beginning of your child's path to financial adulthood. Encourage them to continually evaluate their progress and their goals as they go. After all, while your child's career plans may change, a little bit of planning can ensure that their financial growth remains steady!
JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal and accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction.
JPMorgan Chase Bank, N.A. Member FDIC
© 2019 JPMorgan Chase & Co.
Lynnette Khalfani-Cox, The Money Coach, is a Chase News contributor. Her work has appeared in The Wall Street Journal and CNBC, among other media outlets.