As you plan for your own retirement, there is some financial wisdom you may wish to pass to younger friends and family.
Preparing Your Children for Success
Nurture your children, absolutely. But it’s also important to get them off the family payroll.
One of your biggest financial risks is that your children will remain dependent upon you as adults. It is critical that you do all you can to launch them successfully.
Selecting a College
Many parents cherish the dream of their child enrolling at an Ivy League college. Certainly those can be a ticket to great success. When young people are applying to colleges, their parents should be helping them to discern between price and value. Specifically, they should have real conversations about college costs and what it is all worth.
If your focus begins with cost, private and public schools appear to be vastly different. My first contention is that this is an important factor but should be far from the leading one. Take a close look at what a particular school will do to help your child develop.
It is also important to separate list price from actual cost. Private schools typically will discount the tuition with significant scholar- ships for a majority of students that apply.
What many parents do not recognize when they compare the costs of colleges is that they are not comparing the actual costs for the time it takes to earn a bachelor’s degree. Simply put, many public universities have a very poor record of students graduating in four years. At many state schools, six years is more the norm.
Saving for College
I have seen people with modest incomes who have set aside $300 monthly for each of their children from the time they were born. It might seem that amount would never add up, but by the time the child is ready for college, the college account has grown significantly.
It takes those small deposits growing over time to add up to big money. Projecting a flat return of 6 percent a year is of course not realistic; returns will vary over time based on risks taken and market returns. The cost of college has also gone up significantly over time, so if you saved assuming college costs are static you will find yourself short.
Building a Strong Financial Base
Once they have made it through their college years, many young people today face a mountain of college debt that they will need to incorporate into their planning. Unfortunately, that debt makes it harder for them to set aside money for their future, which they should start doing without delay.
It’s essential that people in their 20s and 30s understand the impact that the decisions they make today will have on their future financial life. Saving for the future needs to be a top priority when you are first independent. It is best to avoid the monthly car payment, full-featured cable bill, most expensive phone plan, expensive vacations, and dining out nightly. If you adopt that lifestyle, before long you will find yourself 30 to 40 years old and having squandered years where you really had an opportunity to start building wealth.
Teaching Money Management
Helping young people learn to manage money is an important parental duty.
By whatever means, it is a good idea to put your children in a position so that when they come out of college they do not have to come to you for money. Think of it as a starting point upon which they can build their wealth. If they know they have their seed money and cannot use you as a bank, they will feel more of an incentive to make this work. They will learn to manage money.
Investing in Marriage
The loss of a spouse can be devastating financially, and often that loss does not involve death—it involves divorce.
In general, divorce is often a financial disaster or at least a significant financial setback. Where once there was one home, now there are two, with all the associated maintenance expenses. More expenses mean less savings, and it becomes ever harder to reach retirement goals. In many cases of divorce, each of the former spouses will need to work an additional five to 10 years beyond what they had planned.
Dealing with Debt
At some time or another, most people decide to make some purchases on credit, whether it is taking out a mortgage for a home or paying with plastic when they go shopping.
When purchasing cars, we simply look at the rates the auto companies offer versus what we can make on our investments. Generally, auto loans are available at very low rates. If the rate is low, I have taken a loan when purchasing vehicles. If the rates go higher in the future, I will purchase cars with cash. For younger people, that may not be an option. I would encourage them to agree to a loan that is for a shorter period than the total length of time they expect to own the car. For example, a four-year loan agreement makes sense if you plan to own the car for eight years.
Traditionally, a house has been a purchase that will gain in value, and therefore a house has long been considered a reliable investment.
But, many Americans are over-housed, reaching beyond their means to buy the most expensive accommodations that they are able to qualify for. I recognize that housing costs are a challenge on both of the American coasts and in many cities. The house becomes a drag on resources that prevents people from saving what they need to. If you were to meet many of my clients, you would notice that their houses are far less expensive than they have been told they can afford.
How have you prepared your children for financial independence? I’d love to hear from you on Twitter @DougGrossCFP.
Any opinions are those of Douglas Gross and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.