If you have been giving your child an allowance, this exercise for college will be similar. If you started working with your child on cash flow management when they got their first job, this experience will be slightly different.

Here are some guidelines for creating an environment where your child can learn and thrive financially.

If this is the first time your child has managed money, this may be your last opportunity to teach them as much as possible about managing cash flow—that is, money coming in and going out. Once they are on their own and living independently, it’s a little too late.

Your Lectures Don’t Matter

You can be both a huge and tiny influence on your child’s financial education.

Let me explain.

On the one hand, your kids as teenagers still have some respect for who you are in their lives, even if they don’t show it. They will listen to you.

However, be clear: They are taking what you say with a grain of salt. They believe they have all the answers and are ready to separate from your oversight. While developmentally appropriate, it can be frustrating.

What I want you to remember is that you really have no idea what they are absorbing and are ready to implement. They have their own brains. They have their own needs and wants. They have their own opinions.

The best thing you can do? Let the consequences do the teaching.

Think back to any lectures your parents gave you as a kid. Now think about how much of those lectures you actually absorbed at the time.

You might appreciate those lectures now as an adult, but in most cases, you didn’t as a kid. You weren’t being disrespectful or dismissive; you just didn’t have the context to make sense of it.

Stop lecturing.

The best thing you can do for your kids is give them enough room to make mistakes. They will learn from direct experience.

You want them to make mistakes when the stakes are low. It’s one thing to make a $30 mistake or a $300 mistake. It’s a much bigger deal to make a $30,000 or $300,000 mistake as an adult.

Let them screw up now, not when the consequences could be severe.

Create the Spending Plan

Chances are pretty good that you will be covering the “big” expenses for college—tuition, room, board, books, travel to and from school, a computer, and any other major items.

What remains is ancillary spending: extra meals (pizza!), entertainment, parties (beer, friends, more beer!), snacks, laundry, and miscellaneous supplies.

I recommend creating a spending plan for this ancillary spending. Decide how much it should be, even if that amount is initially arbitrary, and determine how often money will be transferred to cover those expenses.

For example, consider a college freshman living in the dorms and on the meal plan, with tuition fees and books paid, and the dorm room set up. The student might need some additional items to get through the semester that weren’t anticipated when moving in. Go ahead and pay for those things.

After that, your student might only need $40 a week, for instance, to cover other expenses. Pick an amount.

In most cases, you and your student likely have accounts at the same bank. Set up an automatic transfer for $40 a week on the same day each week from your account to theirs.

This is the easy part.

The Hard Part: Say Nothing, Do Nothing

Now, let the chips fall where they may.

Students are often shocked to discover just how much their lives cost. Chances are, you’ve been covering nearly all of their expenses up until they left for college.

Now they’re getting a real-life experience of what things cost. This is a good thing. They need to start paying attention to prices, understanding sales tax, and recognizing the impact of their spending. This is an excellent education.

Give Them More Money?

Almost inevitably, your student will call at some point and say, “I need more money.”

At this moment, I highly recommend you approach the situation with curiosity, compassion, and confidence, rather than judgment or shaming.

Simply ask, “What do you need the money for?”

If it sounds like a legitimate school expense, find a way to pay for it directly. If it’s not, and they have simply run out of their $40 weekly allowance, your response should encourage growth, framed with compassion and confidence.

You might say something like, “I’m sorry that you’ve run out of money. I know how frustrating it can be when I run out of spending money for the week. I trust that you’ll figure it out. I know you can do it.”

I strongly advise against negotiating—at least not yet. You can offer to send next week’s money early but remind them that no additional funds will be provided.

Let them figure it out. They may whine, cry, or share a sob story about how important it is to have this money, but you should respond with curiosity, compassion, and confidence in their ability to manage.

This experience might even motivate them to get a summer job so they have more spending money next year, which wouldn’t be a bad idea.

Additionally, I encourage parents/caregivers not to slip extra money into their student’s pockets during visits. When was the last time someone did that for you in the real world? Set the tone now: Do you want a financially responsible adult, or do you want a child who keeps coming home for a handout?

When to Negotiate

If the “I need more money” call happens every week, it might be time to revisit the spending plan. Perhaps the allowance is too low. However, before adjusting the amount, make sure your student has documented every expenditure they’ve made with their $40 allowance, and review it together.

Do not judge their spending choices. You might see more pizza, beer, or movie tickets than you’d prefer, but that’s okay. It’s their money, and they can spend it as they wish.

If the list includes necessities like toiletries, this could be a sign that you need to consider increasing their allowance.

Otherwise, hold off until the end of the semester or the following school year to revisit the spending plan.

Borrowing: Just Say No

This is not the time to teach your children to borrow money to meet living expenses. Ideally, they should have the cash on hand to buy what they need. Learning to delay gratification is an important skill to develop.

Credit Cards: Yes, With Rules

When my children, who were in high school at the time, opened their own checking accounts, the bank didn’t ask “if” they wanted a credit card; they asked “when.” I was shocked. The days of providing a secured credit card to help students build credit are gone.

Be prepared: credit card companies hand out credit cards to students as soon as they walk onto campus, often with little to no education provided.

I don’t have an issue with students having credit cards. They can help build credit history and offer educational value.

The key is to take the time to teach them. Make sure they understand what a billing cycle is and how interest works. Strongly encourage them to make one or two purchases on the card per month and pay off the balance in full each month. Ideally, they should have a credit card that allows them to easily make payments from their bank account.

Some advisors recommend paying off a credit card balance weekly or biweekly as a good financial habit, which can be beneficial at the start.

Late Fees and Penalties: The Student Pays Those

As I mentioned earlier, let the consequences do the teaching. If students accumulate late fees or penalties on any account, make them pay those fees themselves. It’s painful, but they will learn through experience.

When was the last time someone paid your late fees, penalties, or parking tickets? Again, let the consequences teach the lesson.

Leaving College With a Great Start to Cash Flow Management

The best thing your child can leave college with, aside from their degree, is the experience of managing cash flow—their “school of hard knocks” degree.

If they can learn to live within their means and delay gratification before they land their first job, they’re already on the path to financial success. There will be more to learn about saving for retirement and investing, but managing cash flow is the essential first step.

We all want our kids to be successful and happy. Since money touches every part of our lives, helping them develop a healthy relationship with money and spending is a major step toward lifelong financial happiness.

If you’re seeking guidance on how to create a financial environment where your child can thrive, or if you have questions, don’t hesitate to reach out to us at Lanning Financial. We’re here to support you and your family through every stage of this important journey.

Pick a date!

You can’t predict the future, but you need to start somewhere. Retiring at 65 is no longer the default. Your target age should stem from your values, so revisit or define them.

Ten years out

This is a time to get a reality check on your financial life and start to envision what retirement will be like.

• Time to take a basic retirement planning class. Look to your local community college, retirement system pension planners, or professional organizations. You’re not trying to become an expert or nail down your plan. But you are trying to figure out what you need to know and what you need to think about.
• How much money have you saved in a 401(k), 403(b) or other retirement account?  Do you need to save more?  Will you need to work longer?  Do you need to adjust your allocations to make them more aggressive or (more likely) conservative
• Will you get a pension? When will you reach the vesting requirements?  How much will you receive? How will it be paid out? In a lump sum, monthly, etc.?)
• Do you have a copy of your Social Security statement? How much can you expect to receive?
• What other assets and investments can contribute to your retirement? Are there any potential drains on your income?
• Start having conversations with your close friends and family members about your vision for your “retirement.”  How do you want to spend your time?  What skills might you want to keep using in part-time or volunteer work?

 Five years out

• Revisit the questions from 10 years out.
• This is a good time to start a journal. Take some of those daydreams you put away and make them more specific. For example, rather than “spend time with grandkids,” you might write “spend two dinners a week with grandchildren.”

 Two years out (or less)

Time to get serious.

1. Make sure your partner/spouse is involved, if you have one and they aren’t already. Communicate and negotiate with them about how you expect to spend your days and money.
2. Hire a financial planner if you haven’t already done so. You want a fiduciary. The Financial Planning Association is a great place to find one.
3. Create a realistic budget. Figure out if you’ll need to work for income or where you may need to cut back on expenses.
4. Figure out when you’ll take Social Security, whether and when you will sign up for Medicare, etc.
5. Turn that “stake in the ground” into a real retirement date. Put a date in the calendar to retire, whether you share this with your employer or not.
6. Get more specific about how you’ll spend your newly found time.

 I often say it’s not about the plan, it’s about planNING. Life happens. Mid-flight corrections are necessary, and you can’t schedule those.  But following this schedule will help minimize the changes and the surprises.

Take the pressure off!

You do not have to have all of the answers now, so start by separating the financial part from the how-to-pass-the-time part. I often tell clients who are “stuck” on how to begin planning for retirement to focus on the first three years and then on the last three years. This takes the stress out of a big question like, “What the heck am I going to do for 20-30 years?!”

For the first three years, write down the collection of projects you want to get done. This often leads to a very satisfying feeling of purpose and direction. It’s like you’re still working, but you’re working on the stuff you want to work on and have been putting off. I’ve had clients travel for a year, remodel homes and take care of grandchildren, to name a few.

Then write down your ideal last three years, which are also usually easy to envision. These are typically slower, easier, quieter. This part also comes with specifics, such as:

• where you’ll live,
• who you’ll rely on for companionship and support,
• how you’ll want to manage your physical slow-down,
• how you want to be cared for and who will take care of you, and
• how you’ll feel at the end of each day

This process helps you figure out how much money or assets you need to set aside to meet these criteria, which will help build the financial part of your retirement plan.

Now for the years in between. I recommend making a list of the skills you want to keep using. This will likely have far fewer specifics than the first or last three years. That’s fine. For instance,

• I’ve had teachers that want to continuing teaching, so they consider tutoring.
• Those leaving executive positions find there are all kinds of nonprofit boards looking for expertise in leadership, development and managing a budget without having to manage employees.
• Some people enjoy mentoring others and find places to create those relationships.
• Talk to others who have retired. Keep your networks going with people who are or are not in the workforce. You don’t need to know exactly what you want to do, but it’s helpful to identify those skills of which you are most proud, most willing to “give away,” and most likely to energize and satisfy you.

In my experience, most people take two to three years to settle into a “retirement groove.” They tackle all of their projects early on, then they hit the end of that list and it takes a while to figure out how to spend their days. Even those who have done a “whole lotta nothin’” in the first year of retirement realize they want to make a change in how they spend their time. This is typical and normal. I also find it takes two to three years for the budget to work itself out. Rest assured, both how to spend time and how to spend money do work out. And both begin with figuring out how to spend the first three years and how to spend the last three years.

Put your attention on your weekly money

What you want to do now is physically separate your money into different buckets.  Here’s what you do next:

1. Set up multiple accounts at your bank.  Most of the bigger institutions will let you set up multiple accounts for free if you automatically transfer money into them each month (which you will).  Nickname these accounts.
    
2. The first account is your “static account” (call it whatever you want).  All income is deposited here.  Leave money there to meet static expenses.  The rest gets transferred to your “discretionary” accounts and your “savings” accounts.
    
3. Only money for the week gets transferred from the static account into the discretionary account.  Make an agreement with your financial partners (if you have them) as to who is going to get how much.  Each person should get a debit card.  Each person spends that money through the debit card. No credit cards.  Pay your static expenses with a credit card if you want the miles. Use the static account to pay off the credit card, but ONLY for those expenses.
    
4. IMPORTANT POINT:  Get enough money only for the week.  Not the month.  If you spend all your money by day 5 of the week, you can limp along for two days without money.  But if you run out of money on day 15 of the month, two weeks is too long to go without money.  Putting your attention in weeks also helps you focus on what you’re doing.  You will be more present.
    
5. Transfer money automatically each month into your “vacation”, “kitchen remodel”, etc. accounts at a set amount (nickname the accounts as such).  For instance, $50 into the vacation, $200 into the kitchen remodel, etc.
    
6. Watch what happens.  

Here’s what I hear from people who have actually done this:  People start to turn it into a game.  They start to see where they could reduce their static expenses.  They start to contemplate whether they really want that new grill (or purse or pair of shoes) or if they’d rather add that money to their “kitchen remodel” account.  They watch their static expenses shrink, they get more present with their decision-making around the discretionary money, and they love to watch their “kitchen remodel” accounts grow.  It’s a game. It’s fun.  It requires little accounting, as most of it’s done automatically.  You don’t have to watch every penny.  You don’t have to know how to use Quickbooks.  Brilliant.  If you have success, I would love to hear your stories.

For many, this strategy isn’t working, either right now or ever.  Those folks need to watch where their money is going.  I’ve long believed the trick to getting started, leave alone getting it right, is to make it easy and fun.  I think I might have found it.  Now, I stick to my inclination not to work with folks on budgeting, bail-outs and bad attitudes, but I’m always willing to share strategies that work.

Think of your money in three buckets—static, discretionary, and future

I will start with an admission:  I don’t actually budget the way I’m about to describe.  I’m stealing this idea from a Financial Planning Association conference I just attended (my whole life is continuing education).  I’m one of those freaky people that keeps track of just about every expenditure, tracks it in Quickbooks with help of my assistant, and analyzes where money is being spent, where it can be saved, etc.  Most people won’t do this, so I rarely, if ever, recommend it. 

What I like about this idea is that it’s easy and fun.  This step should take no more than an hour.  Here’s what you do:

1. Get out the last six months’ worth of statements that contain your expenses (checking, credit cards, etc.).  Six months is required for homeowners, in particular, so it catches semi-annual expenses.  You might want to add other annual expenses.
    
2. Add up all the expenditures and withdraws (ATM withdraws included). Divide by 6.  This is what you’re spending per month.
    
3. Now, go through those statements and identify all your “static” expenses – that is, those that happen every month as a result of passed decisions you have made.  Those expenses include the mortgage(s), property taxes, insurances, car payments, utilities, other loan payments (including credit card interest), childcare expenses (not random babysitting), etc.  Add them up.
    
4. Everything else is discretionary.  Subtract “static” from total expenses.  Remember to keep your timeframe to monthly numbers.  That’s your discretionary budget.  Divide by 4.5 (or so).  That’s your weekly discretionary budget.
    
5. Now sit down and decide what you want or need to save for.  These things could be a kitchen remodel or new clothes or a vacation.  Some folks will add to this quarterly tax payments or annual payments like life insurance premiums.

Here’s what you’ve done.  You’ve gotten a clear picture of how much money you are spending as a result of passed decisions.  That’s your static bucket.  You’ve gotten a clearer picture of what you’re spending week-to-week on food, clothes, household goods, extra babysitting, pet expenses, etc.  You’ve gotten clear about what you want to do with your money. This may take some tweaking along the way, but you’re on your way.  See next week’s post on what to do next.

I had to laugh the other day, though, when a post requested a referral to a financial planner who “could explain all the options for paying for college that people use.”  This person wanted unbiased advice and essentially the a la carte menu of possibilities. That would be a little like me walking into the paint store and saying, “I just want to see all the colors people use to paint their walls.”  Have you ever seen how many colors there are, how many different shades of the same color, and how many brands of paints?  That’s before you get to oil or acrylic.  Don’t get me started on brushes. And have you ever taken a sample of favorite paint home from the store, put it on the wall and hated it?  This original poster would have been better off with a survey.

Your advisor should advise YOU.

Here are the many ways I’ve seen college get funded:

• Kid decides not to go to college or not to go right away.
• Kid decides to live at home and attend two-year college.
• 529 plans.
• Paying out of income as the child goes to college.  In other words, not using savings at all.  (Heck, in one instance, the family’s annual tuition expense went down when the kid left a private high school and went to a state university and the family bought a new car.)
• Brokerage and investment accounts.
• Grandparents or other family members paid for it.
• Scholarships.
• Work-study programs.
• Loans.  (Remember, you can borrow for education but not retirement)
• Life insurance cash values.
• Investment properties (either selling them or using rental income).
• Inheritances and inheritance advances.

I could go on.  My point is that there is no right way to do this, you need someone who can listen to you, understand your values and know who you are, and help you navigate among the many options with a presentation of the beauties and pitfalls of each. That’s what good advisors do:  they listen well, they have opinions, they articulate them, and help their clients come to their own decisions about their financial lives.  This is why good advice is worth it.  It saves you time, money, anguish and agony.  A strategy for college funding is not always easy to just paint over.  Make sure you get as good of a look as you can at the start.

Remember that taxes do good things and you do have choices

First, breathe.  Lighten up.  We’ve all been there in one year or another.  Find gratitude.  The taxes you pay do good things – libraries, schools, roads, people to fix the roads, street lights, police, courts, and the list goes on.  These things may not be perfect, but for the most part, they’re functional.

Second, remember that you have choices.  Here’s something else a bunch of you did this tax season:  You funded your qualified retirement plans.  When you looked at the difference in your tax bill based on whether you funded that plan or not, it felt like a no-brainer to fund it.  You thought, “Look at all the money I saved in taxes!”  You probably thought with pride, “I put money away for retirement just like I’m supposed to and look at how much I put away!”

If you had these thoughts, I want you to contemplate these thoughts:  (1) If you believe taxes are going to remain the same or go down for you in retirement, it makes sense to fund qualified plans.  But if you believe taxes are going up, you’ve just “kicked the can down the road,” when taxes in retirement will likely be much higher.  Did you really save money?  Frankly, taxes are on sale right now.  (2) You may have been better off funding a tax-free retirement with after-tax dollars, rather than a qualified plan, so that when you go to retire, you’ll have fewer taxes to pay, less fear about tax deadlines, and a simplified tax return.  Starts to make retirement look even better, doesn’t it?  Remember that you have choices about how you earn, invest, and spend your money.

Diversify strategies and build in flexibility

Evening out the swings in income and work-flow in business takes practice, patience, strategy, and intentionality.  Business owners should always be marketing, even when they’re busy.  They should either do it themselves or delegate it to an employee. Business owners should always be “working” on the business they brought in (again, either themselves or by employees). This evens out income and it evens out work-flow.  It takes time to make this the culture of one’s work day and one’s business. Then, on top of that, there’s the hard decisions of how much to set aside in boom times for leaner years.  Is the money best saved or reinvested in the business? All these challenges are on-going in business. Been there, done that, still doing it. The balance and the planning have to be intentional.

The same is true for your portfolio.  We use a platform that allows our clients to take advantage of the brain trust of those with PhDs and master’s degrees to determine how their money should be invested based on their philosophy(ies) and willingness to take risk.  Notice I used “philosophy(ies).”  This platform allows my clients to employ different money managers with different philosophies all at the same time. Because, let’s face it, the market is going to do what the market is going to do, and every money manager has an opinion about what you should do as a result, from “buy and hold” to “stay in cash and actively manage investments for positive returns.”  Just as in business, as in portfolios – sometimes there are tough decisions to make along the way, but if one builds in different strategies and provides flexibility for money to grow, chances increase that one will reach investment goals that serve their lives. When the time comes to make changes, changes can be made easily and with unbiased advice.

While I can’t help you directly with the business decisions, I can refer you to people who can.  And if you want to talk portfolios, please give me a call.

A better economy usually means higher rates

Remember, this is a blog—oversimplification will prevail.

Lesson #1:  Rates are driven by the mortgage-backed securities (MBS) market.  MBSs are more similar to bonds than stocks.  Money managers who have to produce returns for their clients invest in stocks (more risky but higher returns) and bonds (less risky but lower returns).  When money managers think companies will produce higher stock returns, they invest in stocks. When the economy shows signs of improvement, company stock prices tend to rise.  So, said another way, when the economy shows signs of improvement, that generally means stock prices will rise, which will cause money to flow to stocks and not bonds (or MBSs).

Lesson #2:  When bond prices decrease, mortgage interest rates worsen.  A bond’s price and its yield are inversely related. That means that when the bond price goes down, the yield goes up (and vice-versa).  Mortgage interest rates track with the yield.  So, as bond prices go down, the yield goes up, mortgage interest rates go up.  The price of a bond will go down when there’s less demand for it.  If money flows to stocks, that means it moves away from bonds.  As bonds are in lower demand, the price will drop, and the yield will increase.  Remember, mortgage interest rates track to the yield.  To review: the less demand for bonds (or MBSs), the lower the price, the higher the yield, the higher mortgage interest rates will go.

The Million Dollar Question: Will the economy improve that much this year?  This is where my crystal ball gets fuzzy.  I think the nightmare of the financial crisis of 2008 is over.  We’re stabilizing.  High unemployment is a problem, and I see it getting slightly better.  I’m a believer that the consumer tends to drive the economy and if they have money to spend, the economy picks up.  I’m a believer that until we start to support the small business person, who employs most of the people in this country, unemployment will remain stagnant and the recovery will be sluggish.  The Fed’s quantitative easing (QE2) and the financial stability of the European countries are the wildcards here.  Given all that, I’m predicting that the economy has a good year and rates will increase a bit to 5.5% on the 30-year.

And by the way, let me put this back into perspective for you.  5.5% is still historically pretty doggone good.  So, if you’ve been “left out” of this past year’s refinance opportunities, this will still be a great year to get it done.  Give us a call.

What your 401(k) advisor likely won’t tell you

The book makes some excellent points about 401(k)’s that are worth noting:

1. 401(k)’s were designed to supplement employer pension plans. When employers realized they could save buckets of money by offering only 401(k) plans, pension plans went by the wayside.
    
2. Not surprisingly, a whole new industry of “401(k) plan advisors” cropped up because advisors could make a bucket of money for putting these plans “under management.” These plans are structured to benefit the institutions and advisors who administer them and the government.  Not you.
    
3. The investment options are usually painfully limited, and the advisor available to you is around maybe once or twice year.  In some plans, you can change your investment allocation only once a year.
    
4. 401(k)’s lack liquidity.  If you access the money before you are 59-and-a-half years old, you pay a 10% penalty.  Sure, you can pull it out for medical emergencies, education or to buy a house.  But most people need it when they are unemployed or in some other financial crisis, which isn’t exempt from the 10% penalty.
    
5. Some employers won’t let you shut down your 401(k) unless you quit your job.
    
6. 401(k) investments are often limited to stock market investment choices and most people don’t have the expertise or the time to research the choices.  The stock market volatility can be a killer, and most people are fully exposed.
    
7. Employers can modify, suspend, or eliminate the company match anytime they want.
    
8. If you borrow against your 401(k) and your employment is terminated for any reason, you usually owe the money back in 90 days.  Or pay the taxes and penalty.
    
9. Administrative fees can easily exceed 3%. If you only take 2% off the top, it can cut your long-term return in half.  If hypothetically, if the administrator invests its 3% from your $8K contribution to your 401(k), in 40 years, the administrator would have more money.  Whose retirement are you funding?
    
10. You’re sold on this story:  Save money in your 401(k) now to get a tax benefit, and then when you retire, you’ll take money out in a lower tax bracket.  The story’s unlikely to be true.  First, I believe tax rates are going up.  But even if they don’t, you’ve likely lost all the deductions you had while contributing to the 401(k) like the deduction for mortgage interest, your dependents, and your 401(k) or IRA contribution.  Those have likely disappeared by the time you retire.
     
11. The government is ALWAYS your 401(k) partner. The bigger your account gets, the bigger the government’s share.  Whose retirement are you planning?
     
12. If you die owning a 401(k), your heirs could get as little as 27% of it after taxes.

  There is a better way.  Let’s talk.