To review, you should start giving your children an allowance as soon as they can count money, usually at four or five years old. Your sole purpose in providing an allowance is to give your children an opportunity to build money skills. Allowance should not be tied to chores. They get an allowance because they’re part of the household; they do chores because they’re part of the household. When it comes to allowance, you get to make the rules and enforce them. You may have values about money that you want your kids to learn. I’ll share what has worked in my house for years.

My son and daughter get an allowance every week, like a paycheck. They receive a dollar for every year of their age — at age 7 they get $7, at age 9 they get $9, and so on. This may seem like a lot of money. Keep reading.

From that amount, my kids are required to give 10%  to charity and put 20% in long-term savings. They get to spend the remaining 70% pretty much as they wish. They have individual places to put this money. For years, we used a divided piggy bank. Coffee cans work just as well. Now we use storage containers. Every week they get an envelope with all their money with the denominations available to make the allocations. You’ll need to help them when they’re young to count and sort the money — it’s a great coin identification and math exercise.

An important note: Make sure they physically handle the money, especially when they’re young, and make them count money when they pay you back for something you bought for them at the store. You want them to have a real life experience of receiving money and watching it leave their hands. We handle actual money so rarely in our society these days. For the longest time, my kids thought that if you needed cash you just went to the ATM and got some. They had no idea that you had to put money in to get money out. So make this reality of having money come into their possession and leave it a part or your kids’ early lives, so they can transfer that experience to the non-cash-oriented world when they’re older.

With all that cash burning a hole in their pockets, sooner or later your children will want to go shopping. Take them, allowing for a significant amount of time to shop, especially early on. You want to make sure they have time to walk all the aisles, pick a variety of things, put them back, choose something else, etc. But leave their money at home. Pay for their purchase yourself, then have them pay you back when you get home. This avoids a lost money crisis and allows for experiences with sales tax, how credit cards work, paying someone back, making change, etc.

Here’s the real trick:  Do NOT judge what they buy. You can set rules and constraints, but after that, hands off. For instance, I didn’t allow my kids to buy toy guns or candy. Sometimes I will put the kibosh on yet another oversized stuffed animal. After that, they can pretty much get whatever they want. This will take much discipline on your part, but I promise it will be worth it.

This plan has incredible beauty that I never saw coming. More on that next time. In the meantime, get your envelopes ready!

The financial planner in this story goes on to explain to his fellow passenger that it’s not the money you need to pass down, but the skills and values that have helped you build wealth. Money can disappear overnight, especially in the hands of those who have no skills to manage it. The old adage applies: Give people a fish and they will eat for a day. Teach them to fish, and they’re fed for life.

I’m a huge advocate of giving children an allowance for this very reason. As a general parenting philosophy, I believe it’s important to let kids have age-appropriate opportunities to screw up when the stakes are low. Direct experience and its consequences are the best teachers. I’d rather my daughter learn that it’s not such a great idea to put the heaviest block on the top of the tower when she’s three years old than wait until she’s 15, when I need her to stack the dishes in the cupboard. It’s the same with money: You want your kids to learn early.

Here’s another belief of mine: We don’t know what’s “sticking” in our children’s brains. Think about it. Memory is such a subjective and selective thing. Almost everyone has a lesson they learned about money that stuck with them. Most of us heard a parent or influential adult say something about money that influenced our beliefs about it, like “money doesn’t grow on trees.” The best thing you can do for your kid(s) is to let them have lots of opportunities to form their own beliefs about money — for example, not spending more than you have, avoiding deficit spending, delaying gratification — so they can form good money habits early. These are crucial life skills, and they don’t get built through our lectures.

I don’t claim to be an expert in this area. Most of my training has come from financial counselor Kathryn Amenta and from my son and daughter, who have been receiving an allowance since the oldest turned five. I encourage all my clients to give their kids an allowance, even if they are much older than that. Better to learn hard money lessons as late as college than when they get their first real paycheck.

How to make it work? Stay tuned.

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.

You can buy a house and you can get a mortgage

Here is what we have been able to do in the mortgage world lately:

• More and more lenders are making appraisals easier.  We are able to use AXIS appraisals, which are based in the Bay Area (fewer Fresno- and Martinez-based appraisers doing appraisals in San Francisco).
 
• We have a lender that will do 90% loans to $979,750!!  That means we can do a purchase of a $1,088,000 home with 10% down.
 
• Rates are still low.
 
• Lenders are still lending on live-work lofts.
 
• Lenders are still doing recent condo-conversions (TICs to condo).
 
• We have lenders that will still fund in the name of an LLC or corporation.
 
• We have two banks that will underwrite and approve a borrower based upon his/her assets and derive an analytical income for qualifying for the loan versus using income derived from tax returns.  This is like a stated-income loan for those with lots of liquid assets.
 
• We have banks that will allow for a community second mortgage or an employer second mortgage, such as the SF Mayor’s Office of Housing program or Kaiser employee loans.
 
• Most condos can be FHA approved by sending in FHA approval packages to the California office or HUD.  Turn-around time is 2-4 weeks.

The rest of the market?  Just as tedious as it’s ever been.  If you have to get a mortgage, hang in there.  The paperwork is oppressive and the conditions are often silly, but it will happen. Call us if you need some help.

A little education can go a long way

It should be no surprise to you if you’re following this blog that I’m not a fan of 401(k) plans.  Most of my clients have them, though.  They need help identifying the best funds, and they need a way to manage those funds.  As you also have probably gathered, I’m a big fan of not losing money and taking advantage of opportunities to make money. 

Time for shameless self-promotion.  If you want to know if you’re in the best performing funds in your 401(k), and if you want to have some guidance as to when you should be taking advantage of the best times to make money in the markets, you ought to check out this tool:  http://lanning.mutualfundmarketalert.com/. Please fill out the sign-in form and watch the video.  I don’t spam.  I don’t sell my database to anyone at any time for any price for any reason.  You may have limited options with your 401(k).  The least you can do is make the most of them.

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.

You can have confidence managing your 401(k)

When I meet my clients with 401(k)s for the first time, most of them have no idea why they chose the funds they did, have no idea whether they’re in the right funds, and have no idea what to do next. So they have done nothing for years and are continuing to do nothing. This does not have to be you. Here’s a game plan for you:

•   Get out your last statement.  Since it’s not been so scary to open it lately, you might actually know where it is.  

•   Check out:  http://lanning.mutualfundmarketalert.com/. It’s the best tool I’ve seen so far to make managing a 401(k) easy.  It’s an educational tool. That’s all. But it might help.  

•   When I tell clients to talk to their 401(k) administrator about their plan, I get either a blank stare or the somewhat rhetorical questions, “yeah, who is that?”  Your company does have a 401(k) administrator somewhere.  Find that person.  

•   Ask the administrator these questions: 
     o   May I please have the list of funds in which I can invest?
     o   How often can I change my allocation?
     o   How do I change my allocation?
     o   Are there any penalties for changing allocations?  

•   Implement the Mutual Fund Analyzer tool. Follow the signal. Make your adjustments. 
 

This is simply an educational tool that might allow you to catch the upsides of more of the markets. You won’t catch the highs and you won’t necessarily miss the lows.  But that’s better than blowing with the volatile wind of this bear market.  And, if you can make some money in the meantime, all the better.

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.