Today, a client of mine invited me to his house for lunch. His son Kevin has just finished college and started a job. The lunch invitation was not just for a celebration, but also to give Kevin a quick financial education and set him up for future financial success. 

Kevin is employed by a small company that pays him a $60k starting salary. As part of his employment benefits, he also gets a 401k plan with 3% employer match. 

As I sat down with Kevin, I had a clear plan of what I wanted to convey to him in the form of questions that I would answer for him. 

When should he start saving and investing?

I want Kevin to start saving now. The sooner one starts, the sooner one can let compounding work its magic for wealth building. In addition, as Kevin transitions from a student to an independent adult who is earning his own money, it’s crucial that he forms a saving habit as soon as possible. Whether he is spending 80%, 100% or 120%  of what he earns, it’s all a big step up for him financially.  But if he gets into the habit of spending all (or more than all) of what he earns,  he will have a miserable life down the road. So starting early is not just about compound interests, but also about habit formation.

How much should he save?

I told him any amount between 10% to 20% of his salary would be good. In the end Kevin came down in the middle, he would save 15% of his salary.

Where should he park the money he saves?

Since his employer offers a 401k plan with a 3% match. I told Kevin to put at least 3% into his 401k plan to capture the employer match. This is like getting a 3% pay raise just by checking a box. Why wouldn’t you take advantage of this? Next I told him if the 401k plan offers good (low-cost) investment options, then he can invest the entire 15% of his savings in the 401k account. If not, he can always open an IRA, a Roth or a brokerage account to park his money.

How should he invest the money?

I told him to keep it simple and go for the lowest-cost option. Small companies almost always are victims of high-cost 401k plans, meaning the investment options are limited to high-cost funds. Luckily, Kevin’s employer appears to t be financially shrewd, there is a good low-cost fund among the investment options. I told Kevin to use this low-cost fund and ignore the rest. Also with such an option, there won’t be any need for him to open other accounts outside of his 401k. 

After a 30-minute conversation, I felt like I had steered Kevin in the right direction and made his parents worry-free. If you have young children in your life, I highly recommend giving them such a gift as well. For current clients, this service is free.  For folks who are not my clients, the cost is only $200. You may pay here: http://paypal.me/mzcapital/200, and let your children grab a time on my calendar: http://calendly.com/mzhuang/30min.

Together let’s steer your children in the right direction, financially!

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