Key takeaways:
- A young adult leaving home to attend university or get their first apartment with friends is a major milestone. But it can be a tricky stage for parents.
- Helping young adults build a realistic budget for when they move out can help them understand the true cost of rent and food, and mindless spending.
- When you demystify credit cards and credit limits, freshly minted adults can get a sense of how tapping their card can add up — and why paying bills on time can protect their credit score.
- Encourage young adults to save and invest early — even small amounts — so time in the market can do the heavy lifting.
When young adults leave home to attend university or get their first apartment with roommates, it’s a major milestone.
Some parents give them the gift of supplies for their school residence room or a big grocery haul to fill the cupboards in their new kitchen.
But what about the gift of financial knowledge?
As they venture into the big, wide world, these freshly minted adults will suddenly have to deal with utility bills and credit card statements in their own names.
It often is a tricky stage for parents; they're watching their now-grown children gain independence and figure it all out, but they could still have a hand in their child's finances. While a student’s part-time job might cover some expenses like textbooks and transit passes, parents or other adults might still be chipping in for tuition fees or cell phone bills or providing a monthly allowance.
Whatever the setup between parent and child, there's still time to share some practical money advice with the 18-year-old who has one foot out the door.
Here are 3 tips that one parent and one financial expert say young adults should know about before they walk out the door.
1 - How to make a budget (and stick to it)
Before sending her children off to Toronto Metropolitan University and Queen's University, Louise Fry ran her son and daughter through budgeting exercises.
"I'd show them the real costs of things like meals, flights, groceries, and gas," said Fry, a wealth manager at TD. "Then I'd have them track one or two months of expenses and compare it to income for those months."
Learning basic budgeting skills is one of the first steps a young adult can take to help them engage in good financial habits once they leave the nest.
Renée Sylvestre-Williams, author of the book, The Singles Tax and the financial newsletter, The Budgette, said budgeting lets young adults understand where their money is going – which is extra important when they’re managing their finances independently for the first time.
Knowing where the dollars need to go, whether they are for rent, groceries, or a streaming service, can help prevent mindless spending.
Budgeting can be done with a spreadsheet, or for those with a TD chequing account, TD MySpend can help keep track of where money is being spent.
Budgeting basics for students and young adults
- Add up all your monthly income: part-time or full-time employment, student loans, grants, scholarships, and any support from parents or grandparents.
- Add up all your monthly costs: rent, bills, tuition, subscriptions, groceries, textbooks, transit passes, and loan payments.
- Build a budget using the 50-30-20 method: There are many budgeting frameworks, but this one allocates 50% of your budget to needs, 30% to wants, and 20% to savings and investments.
Get more step-by-step advice on about how to create a student budget
2 - How to use a credit card (and pay off the balance each month)
Getting a credit card could be a suitable option for many young adults, said Sylvestre-Williams, since it can help them develop a good credit score, which is useful for the future.
“We live in a world where you do need a good credit report and credit score to access things like loans for a mortgage or a car,” she said.
Before her daughter started her first year, Fry helped her understand the impact of casually tapping a credit card to make purchases.
"We reviewed that first credit card statement together," Fry said.
"I think it was a big learning curve for her, because that tapping motion [can be] addictive. But when she saw bubble tea for $8 and hot pot for $10, she started to understand how much eating out would really cost her."
Fry also took the time to explain what a credit limit is on a credit card, why that limit is not an invitation to spend, and what happens when you don't pay the full balance each month or miss a paying the minimum payment for any month.
"We talked about how important a credit history is and what the consequences are when you don't pay on time," she said.
How do I build and maintain a good credit rating?
- Be consistent and on time with your payments on bills, loans, and credit cards. They can set up pre-authorized payments to keep them on track.
- Avoid hitting your credit limit. Maxing your credit card can negatively impact your credit score. Ideally, you don’t want to spend more than 30% of your available credit. Following the 30% rule will go a long way to helping you to maintain a good credit score.
3 - How to get into the habit of saving and investing
Sylvestre-Williams also suggests, even with very little funds, that parents educate their adult kids on the importance of investing early. Years ago, when Sylvestre-Williams was at university, she opened a Retirement Savings Plan account and put $25 in each month. It may not sound like a lot, but it built up over time.
“It’s not timing the market; it’s time in the market. The longer you are in the market, the more time you [may] have for compound interest to accumulate and to recover from market cycles,” Sylvestre-Williams said.
TFSAs for example, allow you to grow your money tax-free within the account, meaning you aren't taxed on interest earned, dividends, or capital gains from qualified investments. That means that when you withdraw funds from your TFSA, you will not pay tax on the amount withdrawn.
Putting aside money into an emergency fund every month can help young people build a cushion that could protect them if they lose a job or need to cover the surprise cost of a car repair or biology textbook.
How do I set up an emergency fund?
- It can be helpful to have an emergency fund sit in a separate account that you can access if needed. Once you’ve opened a savings account, set up a pre-authorized transfer of funds into the account weekly or monthly.
Learn more about why you should consider an emergency fund