One day you’re young and fun, and the next day you find yourself saying, “These kids today have no idea what it means to be financially responsible!”
We’re not calling you old—the reality is that you’re observant. According to a recent survey by Thrivent, 41% of parents in 2023 are allowing their adult children to live with them. Furthermore, of those with boomerang kids—adult children who have come back to the nest—75% of them are not discussing money management at all. At a time when investors should be ramping up their retirement savings and enjoying an empty nest, nearly half are dealing with young adults who have “failure to launch” syndrome.
Among the investors we’ve worked with, we find there are two important lessons that should be taught for young adults to understand the basics of personal finance: prioritizing financial goals and creating a budget to achieve them and understanding the positive and negative dynamics of compound interest.
First, for the boomerang generation, a key step in gaining independence is setting financial goals and assigning specific dollar amounts to them. Young adults may think they’re saving by living with their parents, but if that saved money isn’t going toward a defined goal in regular increments on a scheduled basis, it is easy to lose sight of the purpose for which they’re saving. Having defined financial goals is a critical component in creating a budget. A budget will allow parent-supported young adults to prioritize paying down debt—either student loans or high-interest credit cards—and save for a specific purpose, such as an emergency fund for living expenses so they don’t have to rely on the Bank of Mom and Dad.
The second most important lesson for your stay-at-home children is the complex love/hate relationship that comes with compound interest.
Young adults are in a perfect position to allow compound interest to work in their favor, by participating in their employer-sponsored retirement plan or by saving to an IRA. Even small amounts saved today can grow exponentially over time with compound interest. When you begin saving for retirement in your 20s, you earn interest on your initial deposit, and if the interest is compounded, it is added to the principal. As a result, future interest calculations are based on the new total, including both the principal and the accumulated interest. The longer the money remains invested or saved, the more pronounced the effect of compound interest becomes.
However, compound interest also has a dark side when it is interest on what you owe, such as a loan or credit card balance. In this case, compound interest works against you, because the outstanding balance grows over time. When you borrow money, the lender charges interest on the initial amount you borrow. When the interest is compounded, it accumulates and is added to the outstanding balance, meaning that the interest owed is calculated based on the new total, which includes both the principal and any previously accumulated interest. If you continue to carry the debt without making payments to reduce the balance, the effect of compound interest can make it harder to pay off the debt quickly.
While many other financial lessons need to be learned, understanding these two is a critical phase in establishing financial independence.
If you have questions about providing a solid financial education for your children, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the June 10, 2023 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.