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Preparing Your Children for Financial Independence

In over 35 years of financial planning experience, one of the most often asked questions I get from clients and friends is how to handle the financial implications of their children graduating from college or graduate school. Many of these children have never had the responsibility to pay for their own housing, determine how much insurance coverage they should get on their cars, or even evaluate the options that they may have with their health insurance coverage.

Develop a Budget

In my opinion, the most immediate need that these young adults have is how to develop a budget or spending plan that meets their level of income. In some cases, these young adults have never had to live on a budget. In other cases if the young adult has worked while in school, the earnings might have been allocated towards leisure expenses such as eating out, entertainment or enhancing their wardrobe. Now, after graduation, the parent’s desire is to see their child become financially independent, but yet there could have been little guidance or instruction on how to do so. (For related reading, see: How to Create a Plan to Deal With College Debt.)

But there is hope, if the parent is willing and the child is teachable, to put the young adult on a path to financial freedom. First and foremost, the child needs to learn to live on a budget. The word budget connotes a lot of bad thoughts, so I prefer to use the term spending plan. Developing a spending plan actually gives a certain amount of freedom to the child and helps them begin to make economic choices. Economic choices are at the heart of financial planning. Economic choices will develop financial maturity in these young adults.

A Glide Path

For those young adults who are not able to make a living wage initially, I encourage the parents to develop a glide path for that child as they learn the mechanics of money management and provide them with a runway for financial success. A glide path is a plan whereby the parent initially takes responsibility for paying certain bills with the plan that, at some point, the child will take over that responsibility. 

For example, one of my children is on the glide path and I have been providing her with a monthly allowance since her graduation. At first, the monthly amount helped her with rent, car insurance, cell phone, etc. But as the months have passed, I have reduced the monthly amount as she begins to take responsibility for all of her expenses. 

Is there a magic number of months to provide this stipend for their lifestyle? I don’t think so. In some cases, the glide path can be one year – in other cases, it can be two to three years. But there is the ultimate goal of allowing the child the joy of providing for themselves, an outcome that both the parent and the young adult want. (For more, see: Family Wealth: Thankfulness Vs. Gratefulness.)

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