Helping Young Adults Gain Financial Independence

Our daughter is heading off to college in a few months. We'll provide for her while she's in school but also want to encourage her financial independence. How can we best prepare her to thrive on her own?

I'm reminded of something my brother once said about his own children: "When the kids were young, they lived my lifestyle. But as they become adults, it's important that they create their own lifestyles."

I love this perspective because it focuses on what a child can gain from financial independence rather than what they'll lose when mom and dad stop paying the bills.

But how do you help ensure your daughter develops the knowledge and skills she needs to become a financially independent adult? Here are a few ideas.

If your family doesn't regularly discuss money, it's time to change that. Most kids don't pick up healthy financial habits on their own; they must be taught.

Start with a discussion of how your daughter thinks about money and spending, as well as her expectations for financial support throughout college. Are there areas of financial literacy she needs help with? Are her principles aligned with yours? If not, try to appreciate where she's coming from and help her understand your position, including the lessons you've learned from past experiences—both good and bad.

Once she's in college, it's important to remove the financial training wheels so she can learn to ride on her own. For example:

• Give her an allowance: One of the best things you can do for your daughter is to teach her how to live within her means. Help her estimate her expenses and create a budget so you can determine an adequate allowance—then reinforce the importance of sticking to her plan, including the consequences of overspending.
• Encourage her to save: If your daughter works part-time during school, encourage her to start saving and investing for her retirement. Consider matching her contributions and educating her on investment choices, which can help prepare her for managing employer-sponsored plans when she starts working full-time.
• Help her establish a credit history: Many banks offer low-limit student credit cards that can help your daughter establish a credit history and build a healthy relationship with debt. But be sure to discuss with her the importance of paying her bill on time and in full each month—and the perils of revolving high-interest debt.

Becoming a legal adult is a significant milestone. Turning 18 comes with a host of new rights, such as the ability to vote, enter into a contract (such as the lease for an apartment), and even create a will. But this transition also means you as a parent lose some rights related to your daughter's private information. Assuming your daughter agrees to restoring some of this access to you, at least during her college years, you might consider:

• Health Insurance Portability and Accountability Act (HIPAA) authorization: Unless your daughter signs a HIPAA release, health care providers cannot share anything about her health with you, even if she's on your health insurance.
• Family Educational Rights and Privacy Act (FERPA) authorization: Similarly, she'll need to sign a FERPA release for you to access her academic records—including any campus health records, which are not covered by HIPAA.
• Health care proxy: Sometimes known as a durable medical power of attorney (POA), this document allows you to make medical decisions on her behalf in case of incapacity.
• Financial POA: Similar to the health care proxy, this document allows you to make financial decisions in case of incapacity, as well as access her financial records.

Adulthood also means initiation into the wild world of taxes. Setting up a family meeting with your tax advisor can help introduce your daughter to the basics, such as W-2s and W-4s, tax brackets, the standard deduction, and whether she'll need to file a tax return. (Generally, single individuals who earn less than the standard deduction—$14,600 in 2024—don't need to file a return, though it could still make sense to do so if they're due a refund or eligible for certain tax credits.)

It's also important to explain investment taxes and portfolio management, especially if you've established a custodial brokerage account that she will take control of when she reaches your state's age of majority (generally 18 or 21).

Yes, our first concern is for our children, but it's prudent to protect yourself from the unexpected. For example, your daughter can stay on your health insurance until she turns 26, but you might want to have her purchase her own auto insurance so that your assets aren't at risk if she's involved in a significant accident. If you want to keep her on your plan, be sure your liability coverage is equal to one to two times your net worth across your regular and umbrella policies.

A child's 18th birthday is also a good time to update your estate plan, paying special attention to your wills, trusts, and the beneficiary designations on your life insurance and financial accounts.

This is a lot to digest, I know, but I have one final piece of advice: While your daughter is forging her independence, make sure she knows you're still there for her. She's likely to make mistakes, but providing encouragement and support can help her work through the challenges in a safe environment so she's prepared to face the real world with confidence.