4 Tips To Help Make Your College Grad An Investor

Looking for a gift for the college graduate? Consider the gift of investing knowledge.

While many college graduates may be concerned primarily about paying off loans, many don’t think about investing. A 2015 Bankrate.com survey showed only 26 percent of adults younger than 30 own stocks.

Part of that may come from feeling they don’t have a lot of extra money, and part of it may be not knowing how to invest. Parents can play a part in helping students learn how to start investing and saving for their future.

Opening a Roth IRA

In lieu of a physical gift, parents or friends of the graduate can give money to start an individual retirement account, says Tim Steffen, director of financial planning at Baird in Milwaukee.

“It’s a common strategy with parents who have some extra cash flow. Technically that’s a gift; you give the money to the child, they invest it in the account. The account is the child’s account; you can’t open it in the parents’ name,” Steffen says.

Richard R. Dwyer, chief executive officer and financial adviser at Wealth Financial Group First Coast, in Jacksonville, Florida, recommends a Roth IRA for the graduate because of the tax benefits.

“They’re in a lower or the lowest tax bracket they’ll likely be in since they’ll be in the initial part of their career. By putting money in a Roth account there are great benefits, not the least is tax-free funds when they retire,” Dwyer says.

Living At Home – And Saving

Many people under 30 are still living with their parents, particularly this generation.

Angie O’Leary, senior vice president, head of investment products at U.S. Bank Wealth Management in Minnesota, says parents can use this time with the kids back in the nest to help them get a start on their finances.

Living at home means they can save on rent, and if they’re younger than 26, still be covered under their parents’ health insurance. However, O’Leary says, parents and children need to agree that if parents cover some living expenses, then the child needs to commit to save, especially if they have a 401(k) at a new job. She says she made this deal with her own son, telling him they would cover his phone, health insurance and other incidentals if he would save.

“He did that, and managed to save $20,000 between when he first started his career. Now he is 26. That includes the free company match. That was pretty exciting. He got his statement the other day and sent me a picture. He was pretty proud of that. This is a good time for parents to share their investing philosophy. It’s a great time to talk about risk and long-term goals and how all of that works with that young grad.” O’Leary says.

Steffen agrees the talk should be about long-term goals versus retirement savings, as “a 22-year-old is not thinking about retirement.” Instead, he says, talk about what they want to do. So you want to take a big European vacation and go backpacking through the mountains. How are you going to pay for that? You have to build up some capital to do that. You do that through saving and investing,” he says. “You (the parent) have to ask, if you’re not going to invest, what is your alternative? How else are you going to build up the nest egg you want to do the things you want to do?

Keep Things Simple

An index fund in a 401(k) is a good starting choice for young grads, Steffen says. Fund choices can be overwhelming, and while most 401(k) plans have online guides, parents can help with choices, or bring their graduate to talk to their financial advisor.

“I know a lot of investment advisors would be more than happy, if not eager, to talk to their client’s children about investing strategies. A lot of the good advisers have … younger members of the teams who can relate to those new college grads or younger investors,” Steffen says.

Balance Loan Payoffs With Saving

The average 2016 graduate holds $37,172 in student debt, according to calculations by student loan expert Mark Kantrowitz. With that debt overhang, it’s easy to understand why graduates may focus on paying off debt instead of investing. Look at the math when deciding whether to accelerate paying down debt or investing in a company 401(k) or a Roth IRA.

“Let’s say you have a low student-loan debt number, say 3 percent, and on your 401(k), you’re getting a match from your employer. You’re making 100 percent on that (match). So do you want to pay off 3 percent and give up 100? The reason why it’s such a hard question to answer is so many people want to get out from under that debt. I say to them always put something into their 401(k) to get the match, and then whatever is left over, if they want to accelerate the down payment on the debt, they can,” Dwyer says.

Steffen says a combination of paying off debt and investing can work. He also says people should take into consideration how they feel about the student-loan debt.

“The emotional side, the psychological side is, if you sleep better at night not having that debt hanging over your head, then by all means pay it off,” Dwyer says.