Most young adults receive their first exposure to personal financial planning and money management during (or immediately after) college, through a distinct lack of doing anything of the sort. They are most likely no longer living with their parents, so food is harder to come by as there is not a stocked pantry or fridge to raid anymore. The enticing draw of going out with friends can be hard to resist. The sheer amount of time and freedom to use that time after college can lead to their source of money being dried out surprisingly quickly, if they are not careful.
The actions to take in order to avoid these situations may seem obvious to people older and more experienced, but might be an entirely new concept to a young adult. So how can an advisor teach college-aged people to manage their money without becoming discouraged and giving up? These three steps, while not be-all-end-all solutions, will give young clients a good baseline to begin practicing healthy money management.
1. Track the flow of money
While it is important to know how much they want to spend or save, it is even more important to know what they are currently spending and saving. Without knowing how much money leaves and enters a young client's hands right now, the advisor and client will never be able to reliably plan how much money they will have in the future. This step might bring about several revelations as to where their money is going, and it is important as an advisor to keep the clients from being discouraged. They cannot find out where they are going without first knowing where they are, no matter how difficult a conversation that may be.
Implementing this step can be as simple as recording the money a client spends and receives each day. It could also consist of detailing the different purchases they have made, creating graphs to represent their current flow of money, or using a pre-made budgeting software with all the bells and whistles. Whether the system of tracking money is simple or complicated, emphasizing consistency in tracking when and how much a client is spending is the key to successfully managing their money.
2. Create a budget
Once a young client is consistently tracking their income and expenses and have a good feel for the ebb and flow of their money, it is time to create a budget. This budget should represent the realistic expectations of everyday life. To make implementing a client's budget easier, the budget should be introduced incrementally. For example, their budget could specify continuing their current trend of spending for groceries and other food needs, but limit how much they spend on clothing and shopping. Incremental change will allow clients to more comfortably adjust to their new budgeting lifestyle, whereas an “all at once” strategy may make it more difficult to for them to succeed financially.
A budget can be created using the same techniques as tracking spending, and would ideally be paired with the same system that is used to track money. To reiterate the first step, while the complexity of the budgeting system used can vary depending on an advisor's (or client's) goals, it is not as important as consistency in budgeting and setting realistic expectations.
3. Implement and adapt to the budget
While this is the final step in this implementation process, it is not the final step in the overall budgeting journey. Clients should begin following their budget, and as they or their advisor comes across parts of the budget that were unrealistic or were well under budget, adjust those to match the newly realized situation. Budgets are meant to be adapted to current situations and there is no shame in adjusting them to reflect that.
One last important note to keep in mind: advisors and clients should not expect to make these changes and see progress overnight. Tracking spending, creating a budget, and acting on the budgeted plan can be a large culture shock to young clients used to the college lifestyle. As with most things in life, managing expectations and doing things in moderation can make living on a budget much easier and improve quality of life drastically. Advisors should start prospecting for younger clients to begin tracking and budgeting sooner rather than later to see even more success in the future.
The NaviPlan client portal from Investcloud gives advisors and clients the means to a collaborative relationship, with 24/7 access, interactive budgeting capabilities, and more. To learn more, click here or call (855) 885-7526 to speak with an Investcloud representative. You can also click here to request a trial.