By Douglas K. Freeman, J.D., LL.M — Executive Vice President, Director of Consulting
You have reached adulthood. Congratulations. Now comes the hard part. You are responsible for the rest of your life! Becoming responsible for yourself includes taking charge of your financial life. Perhaps nothing is more frustrating to parents than the financial irresponsibility of their young adult son or daughter. Conversely, little is more exasperating to the young adult than the parents’ lack of respect for their independence. Both actually want the same thing, but see the world through very different lenses.
The hardest part is actually starting the conversation; but having open and frank discussions about finance is much more important than you may think. Above all, it puts everyone on the same page. No one wants to be stressed out every month dreading the credit card bills, unsure of what to expect. With no mutual understanding, this can be a nerve-racking process for both parents and children.
Many children with successful parents dread the “money talk” because they fear being viewed as failures or letting their parents down. Often, this can cause children to enter the conversation on the defense with a combative attitude. But without guidelines, children may find themselves constantly scolded, criticized, or punished for spending “too much”. This can be especially confusing if the anger and punishment are random and inconsistent.
This reaction is easily preventable by understanding your parent’s household budget and setting up your own budget. This does not necessarily mean you will have to spend less; it means you will have guidelines and know what to expect each month. Budget planning not only helps you to become aware and responsible of your own spending, but also requires organization and will provide skills that you will need in order to become successful yourself.
A budget spreadsheet is the best place to begin. You should be the first to draft a personal budget, with an understanding that parents have line-item veto power. It should be clear that the budgeting process is a discussion that will involve compromises.
Building a Budget Starts with Asking the Right Questions
What are all your sources of revenue or income? Remember, “revenue” is just another word for cash you have received. It is not necessarily “income” that you may have earned. It is just money in.
Some revenue is reoccurring and you can count on it in your budget.
Good examples are your salary or interest from your saving accounts or money market accounts. Other revenue may be non-reoccurring. A cash gift on your birthday last year from your crazy uncle may not happen again this year. It is risky to assume that you are “entitled” to a gift. But, in building your budget, you have to identify all the sources of revenue that you can realistically count upon. So, include...
- Cash gifts you expect to receive (birthdays, holidays, etc.);
- Earnings from your job;
- Interest from savings or from investments;
- Dividends from stocks;
- Rents from any real estate you own; and
- Distributions from a trust created for your benefit.
The second step is to identify where your money is going.
Some of your expenditures are fixed and reoccurring … rent, car payments, insurance, mobile phone and data, etc. Some of your expenditures will vary each month … gasoline costs, food and entertainment, laundry, gifts to others, and grooming. If you are like most folks, you can identify where about 75% of your money goes and then you will wonder just where the rest went. The key to building a solid budget is to find the remaining 25%.
The last and most important step is to set financial goals.
This begins with a commitment that you will not spend more than your revenues. If you ignore this rule, you will soon find yourself with debt you cannot repay. Contrary to popular belief, parents are not ATM machines. Adulthood brings both independence and personal responsibility. Ignore this rule and you will one day find yourself staring at bankruptcy.
While setting your goals, determine what percentage or dollar amount of your annual income you are prepared to put away for a rainy day or your retirement, and how much you would like to contribute to charity.
One of the keys to your success in life and in business will be to create a budget and maintain the discipline to follow it.
At First Foundation, we are concerned not just with the tax and economic consequences of wealth planning, but with the impact of that planning on the lives of those for whom the wealth was intended to benefit.
First Foundation, a comprehensive wealth management firm, provides investment management, wealth planning, consulting, trust and banking services.