Published on June 2, 2023 in the Rochester Business Journal

The sun is shining, temperatures are rising, and the sounds of Pomp and Circumstance are in the air. It's graduation season again and, whether your graduates are finishing high school or college, you may be wondering if they are prepared with sufficient knowledge of personal financial skills to be successful. If you expected them to learn that information at school, you may be disappointed. As of May 4th of this year, only nineteen states required high school students to take a personal finance class before graduating (New York is not one of them), nor is it typically required in college.

As a reader of this journal, you may be a financially astute parent, but maybe you forgot to give your graduate some of that guidance at home. I admit to some of that. I was reminded of it after a college finance professor commented to my son that “I’m sure your wealth-advisor-father got you started early with a Roth IRA.” Oops! I hadn’t. Well, it wasn’t too late.

As soon as possible, we sat together and crafted a plan. What assets should be purchased? What kind of account should be opened? How much could be invested? How much should be invested? All of these questions, interesting as they were, put the horse before the cart. So where to begin?

First: understand what needs to be addressed.

Financial advisors will use different terms to evaluate this basic issue. Sometimes it will be categorized into needs, wants and wishes. Those are broad categories that can help us identify specific goals and strategies to achieve them. For a graduate fresh out of high school or college, those goals can be very wide ranging, and the prioritization of those goals is a critical part of the plan that is unique to each individual. More important to understand are the kinds of skills that would allow graduates, and anyone else, to navigate the many issues of financial literacy.

Many financial companies include education pages on their websites. CNB University, for example, includes a list of “30 Steps to Financial Wellness” that is good for any beginner. Schwab MoneyWise similarly discusses issues of financial literacy for those just starting out. Popular financial advisor Dave Ramsey has articles and a financial literacy curriculum for high school students, and MoneyProdigy has a curriculum for teachers of middle school students. It’s never too early to learn good financial habits!

These are a few of the many free resources available to assist the students and graduates in our lives. The most important issues can be boiled down to a relative few. Here are some of them.

Decision-making and goal-setting.

You can’t chart a course for a dream vacation if you don’t have a dream. The same is true for financial goals. For some people, it’s all about “the number” – an idealized level of accumulated wealth that marks some semblance of success. But what is the purpose of that number? Unless you love money for its own sake, “the number” can be very arbitrary. For a newly minted high school or college graduate, one goal may be investment in a further degree or in a trade. Some worthwhile questions that often go unasked are, what is the expected payout from that extra education, and how much of a capital outlay is it worth? Knowledge is valuable, but not at any price. So, making good decisions to achieve one’s goals is a vital skill.

Budgeting.

This topic makes every list. Whether the new graduate will be earning a six-figure salary or minimum wage, living within one’s means is critical to long-term success. Budgets help us to achieve our goals by making us more aware of essential living costs (like food, clothing and shelter) and tracking those discretionary expenses that can easily upset our plans. But making good decisions applies to the essentials as well as the non-essentials. Yes, food is necessary, but we don’t have to eat out every night. And that Starbuck’s latte? Only if there’s extra money left over from our paychecks. And let’s remind our grads to “pay themselves” by creating an emergency fund for unexpected expenses. A rule of thumb suggests maintaining a cash reserve equivalent to three to six months of normal living costs. And, as much as possible, save now for longer term goals, such as further personal development, and even retirement. Beginning early puts the power of time on our side.

Debt.

Borrowing comes in many forms, such as credit cards, student loans, car loans and home mortgages. Each is a means of smoothing out the financial gaps created by timing differences in income and expenses. Like fire, they are useful tools when applied appropriately, but when combined with poor habits and bad decisions, they can bring financial ruin. Budgeting skills and personal discipline are keys to their successful use. Unfortunately, getting overextended for a home or car purchase, or buried in credit card debt to finance day-to-day expenses, are very common stories.

Investing.

The optimal investment is always dependent on the goal in mind. Matching assets with the timing of expected liabilities is an important consideration. So is the level of risk that can be tolerated over an investment time frame. Short-term goals generally call for safer investments, while long-term objectives allow for the greater volatility of risky assets. This is the interplay between risk, reward and asset class allocation, but it doesn’t even touch on the cornucopia of legal instruments in which investments may be packaged (e.g., bank accounts, retirement accounts, 529 plans, etc.), each with its own nuance.

Equipping students for financial success is not a quick process, and it’s complicated by the lack of financial knowledge of many adults. Recent surveys suggest that roughly one-third to one-half of Americans lack a sufficient knowledge of personal finance, and barely half are on track for their own retirement. This suggests that many poor financial habits may be ingrained by our culture of instant gratification. But prudent decision-making about the most basic of life issues may be most important of all. A joint, long-term study by the Brookings Institution and the American Enterprise Institute suggests that 97% of people who make the following life decisions, in sequence, will not be poor when they reach adulthood and beyond: “get at least a high school education, work full time, and marry before having children.” By definition, our graduates will have the first of those accomplished, and that’s a major step toward financial success.

To see this column in the RBJ, click here.